By Daniel Butler ([email protected]), Director DBA Lawyers
As one of a number of ‘housing affordability’ measures where superannuation is seeking to encourage housing affordability, downsizer contributions were introduced from 1 July 2018 to allow those aged 65 or over to sell their main residence and make up to a $300,000 contribution to superannuation or $600,000 for a couple provided the relevant legislative criteria is satisfied.
Indeed, Michael Sukkar, Minister for Housing and Assistant Treasurer, in his Press Release dated 28 June 2019, confirmed that:
Older Australians downsizing from their family homes have contributed $1 billion to their superannuation funds, building up retirement incomes and freeing up housing for younger families, Minister for Housing and Assistant Treasurer, Michael Sukkar announced today.
- 4,246 individuals have utilised the Downsizer measure;
- 55% of contributions have been made by females and 45% from males;
- Individuals from every state and territory have made Downsizer contribution with the top three states being, NSW (31%), VIC (26%) and QLD (24%).
This article examines two key questions:
- How do downsizer contributions work?
- What are some tips and traps for SMSFs in utilising downsizer contributions?
This is an important strategy for advisers and there has not been much education especially for the tax advisers and accountants on downsizer contributions and that’s why I’m writing this article. In particular, a sound understanding of the tax provisions driving the downsizer contributions is beneficial.
How do downsizer contributions work?
There are three broad steps, as outlined below, that need to be followed for a member to be eligible to make downsizer contributions. The downsizer contribution criteria is largely contained in s 292-102 of the Income Tax Assessment Act 1997 (Cth) (‘ITAA 1997’).
Step 1: Eligibility
The first step the member needs to take is to confirm that the amount they wish to contribute will constitute eligible downsizer contributions. Broadly, an eligible downsizer contribution is where:
- the contribution is made to a complying super fund by a member aged 65 years or older;
- the amount is equal to all or part of the ‘capital proceeds’ received from the disposal of an ownership interest in a dwelling that qualifies as a main residence in Australia, under the downsizer provisions;
- the member or the member’s spouse had an interest in the main residence before the disposal;
- the interest in the main residence was held by:
- the member;
- the member’s spouse;
- the member’s former spouse;
- a trustee of the estate of the member’s deceased spouse;
during the 10 years prior to the disposal; and
- The member has not previously made downsizer contributions in relation to an earlier disposal of a main residence.
A member’s ownership interest in a dwelling must be held by individual or their spouse. The ownership interest in the dwelling being sold (ie, broadly, a legal or equitable interest, or a right or licence to occupy the dwelling) must be held by the individual (in respect of whom a downsizer contribution is being made) and/or their spouse, just before the disposal.
The member should determine whether they are eligible to make downsizer contributions and whether their main residence satisfies the above criteria prior to the disposing of their main residence in order to make a downsizer contribution.
Note that a caravan, houseboat or other mobile home does not qualify as a main residence for these purposes. Thus, the grey nomads travelling around Australia in their luxury motor homes, caravans, houseboats or yachts will not be eligible.
Step 2: Contributions
Upon the sale or disposal of a main residence a member can make up to a maximum of $300,000 in contributions to their super fund above their usual concessional and non-concessional contribution caps in the relevant financial year. A downsizer contribution must not exceed the lesser of $300,000, or the total capital proceeds that the individual, their spouse, or they both, receive from disposing of their ownership interests in the dwelling.
Further, there is no age limit or gainful employment test that needs to be satisfied (however many SMSF deeds prepared prior to 30 June 2018 preclude such contributions and an SMSF deed update may be required).
Moreover, downsizer contributions are not counted towards the relevant member’s contributions caps or total superannuation balance (‘TSB’) in the financial year a downsizer contribution is made. The $1.6 million (indexed) total superannuation balance restriction (which applies to, among other things, determine an individual’s eligibility for non-concessional contributions) does not apply in respect of downsizer contributions in the financial year the downsizer contribution is made. Thus, a member could have say $2 million in super and still make a downsizer contribution.
Once the member sells their main residence, they are required to make downsizer contributions to their super fund within 90 days after the day the ownership changed (typically 90 days from settlement).
Given this 90 day timeframe, a member cannot make downsizer contributions if settlement is, for instance, on vendor terms or a settlement date that goes beyond the 90 day period unless they have been granted an extension from the ATO.
While multiple downsizer contributions in respect of the sale of the same residence can be made, as noted above, the total amount of downsizer contributions made by each member cannot exceed the lesser of the total capital proceed or $300,000. This total amount includes the amount of all downsizer contributions a member makes in respect of all of their superannuation funds.
It is important to note that the maximum $300,000 downsizer contribution cap is for only one member and therefore this allows for a couple to contribute up to $600,000 (ie, 2 x $300,000).
Step 3: Reporting and Verification
Upon the super fund’s receipt of the downsizer contribution form the super fund must inform the ATO during the super fund’s annual reporting. The ATO will then run verification checks on the amount and may contact the member for further information.
An approved form should be completed by the contributing member(s) and given to the trustee of the super fund detailing the amount that is to be attributed to downsizer contributions.
If the ATO has verified that the member has made eligible downsizer contributions, no further action is taken.
However, if the contribution does not qualify as a downsizer contribution, the ATO notifies the superannuation provider. The amount will then either be allocated as a non-concessional contribution — if permitted by superannuation law and may result in the member exceeding their cap — or refunded to the member in due course. Expert advice should be obtained if the contribution fails to satisfy the downsizer criteria as there are special rules for dealing with excess contributions and a hasty withdrawal of the contribution may give rise to further consequences.
Tips and traps for SMSFs and their members?
Members should note that disposing of their main residence (which is exempt from Centrelink’s asset test) and contributing downsizer contributions to their super fund (which is counts towards Centrelink’s asset test) may adversely impact on their Centrelink entitlements. This is because the Commonwealth Government’s age pension provided via Centrelink is assessed against, among other things, an assets and incomes test and those who exceed the applicable thresholds will be denied an old age pension in whole or in part.
A person’s family home is generally not included in that person’s assets test, however superannuation savings are included once a member reaches pension age. This means that if a member disposes of their main residence and makes a downsizer contribution, the member may either have:
- a reduced age pension; or
- no entitlement to any age pension.
The current asset test thresholds for the Centrelink age pension are broadly summarised as follows at the time of writing are:
|Full pension||No pension above this limit|
|Reduction rate||Pension is reduced by $78 p.a. for each $1,000 of assets over the full pension threshold|
|Indexing||Full pension thresholds are indexed each 1 July in line with CPI|
This aspect significantly reduces the attractiveness of the downsizer provisions for those who would be worse off as a result of a loss to their age pension entitlements. For example, a couple disposing of a dwelling valued at $600,000 to contribute to superannuation when they have $471,000 of assets and then deciding to rent for a period of time would be denied an age pension as their assessable assets for Centrelink purposes would exceed the maximum $1,070,500 threshold in the above table.
The main residence exemption
An understanding of how the capital gains tax (‘CGT’) main residence exemption operates is fundamental for advisers to provide strategic advice on downsizer contributions. As noted above, the dwelling must have been the main residence of the person that satisfied the main residence exemption criteria (in subdivision 118B of the ITAA 1997). In this regard, the ATO note in Law Companion Ruling LCR 2018/9:
- To make a downsizer contribution the dwelling must have been the individual’s main residence, at some point during the period of ownership, for the purposes of the main residence exemption. Specifically, the capital gain or loss relating to the disposal of the old interest must be wholly or partially disregarded because the property has been treated as their main residence.
It is also important to note that s 292-102 also provides that a downsizer contribution can also be made if the dwelling was a pre-CGT asset (ie, it was acquired prior to 7.30pm on 19 September 1985 when CGT was first introduced via press release by the then Treasurer Mr Paul Keating). The ATO confirm this in LCR 208/9 as follows:
- If the interest was acquired prior to 20 September 1985, an individual is able to make a downsizer contribution only if they would have been able to claim this main residence exemption had the dwelling been acquired after this date.
To examine the an example of Peter who acquired his main residence around 20 years ago for $600,000 (on 1 July 1999) that disposes of it on 30 June 2019 for $1,800,000 when the final 10 years of his ownership interest, it was rented to a third party tenant, the following CGT implications would broadly apply:
- assuming Peter does not have any capital losses and cannot rely on any other exemption under the main residence provisions such as s 118-145, 50% of the capital gain will be exposed to tax given his ownership period that the property was used as his main residence is 10 years and 50% of the time it was used to produce assessable income;
- s 118-195 broadly pro-rates the main residence exemption based on the extent to which the residence was used as the person’s main residence during the entire ownership period (ie, capital gain x [non-main residence days/days in your ownership period]); and
- since Peter held the asset for more than 12 months, the 50% CGT discount under Division 115 of the ITAA 1997 is then applied to the capital gain in accordance with step 3 of the method statement in s 102-5. Since the asset was acquired prior to 21 September 1999 the indexed cost base method under s 118-36 could also apply but Peter has elected for the general CGT discount under div 115 to apply instead. We also, naturally, assume here that the gain is not on revenue account as, broadly, the CGT provisions apply on a secondary basis with a reduction to any capital gain to the extent that it is otherwise assessable on revenue account in accordance with s 118-20.
This results in a net capital gain on disposal of the asset and capital gains tax as follows to Peter:
|Example of disposal by Peter|
|Less: Partial main residence exemption – s 118-185||50%||600,000|
|Capital gain (reduced by MRE)||600,000|
|Less: Div 115 50% discount||50%||300,000|
|Net capital gain||300,000|
|Tax at 47% assuming top marginal rate + Medicare||47%||141,000|
As can be seen from the above example, Peter will pay CGT of $141,000 if he disposes of his residence to make a downsizer contribution and this has to be factored into each client’s particular strategy unless the residence was the person(s) main residence for their entire holding period.
Related party transfers/transactions
If a dwelling is transferred from a ‘transferor’ spouse to a ‘transferee’ spouse for no consideration, the transferor is still, for CGT purposes deemed to have received the market value of that asset under the market substitution rule in s 116-20 of the ITAA 1997. The following is an extract of this provision:
(1) The capital proceeds from a * CGT event are the total of:
(a) the money you have received, or are entitled to receive, in respect of the event happening; and
(b) the *market value of any other property you have received, or are entitled to receive, in respect of the event happening (worked out as at the time of the event).
Conversely, the ‘transferee’ spouse obtains a cost base equivalent to the market value deemed to have been paid under s 112-20 of the ITAA 1997. The following is an extract of this provision:
(1) The first element of your *cost base and *reduced cost base of a *CGT asset you *acquire from another entity is its *market value (at the time of acquisition) if:
(b) …; or
(c) you did not deal at *arm’s length with the other entity in connection with the acquisition.
In some jurisdictions such as Victoria, a duty concession may be available for the transfer of a person’s principal place of residence where there is, among other things, no consideration provided in relation to that spouse to spouse transfer. Thus, where, say a husband transfers his main residence which is valued at $1 million (which qualifies for the main residence exemption and has been held for more than 10 years) to his wife, the husband is deemed to have received $1 million in capital proceeds under s 116-20 and the wife is deemed to have a cost base of $1 million under s 112-20 for CGT purposes.
The question might therefore be asked, can the husband who is over 65 years make a downsizer contribution?
The ATO has responded to this scenario in LCR 2018/9 as follows (with emphasis added):
- Capital proceeds are defined in the ITAA 1997, and for most cases are the money received, or entitled to be received, from the sale of the interest in the dwelling. The policy intent for the downsizer measure is that an individual source their downsizer contribution from the total proceeds received from the disposal of the ownership interest in the dwelling. It is not intended that an individual be eligible to make a downsizer contribution by entering into a non-arm’s length arrangement to dispose of their ownership interest in the dwelling for less than market value and applying the CGT market value substitution rules so as to be taken to have received the market value of the ownership interest.
- On that basis, where an individual disposes of their ownership interest in a dwelling to a related party on a non-arm’s length basis for less than market value, and the individual or their spouse make downsizer contributions the total value of which exceeds the amount of the sale price specified in the contract, the Commissioner will consider whether Part IVA of the Income Tax Assessment Act 1936 (Part IVA) applies to the arrangement. Part IVA applies to a scheme if a tax benefit has been obtained in connection with the scheme and the main purpose of a person who participated in the scheme, or a part of it, was to enable a taxpayer to obtain that tax benefit.
Note that a proposed amendment to s 292-102(3) is included in the exposure draft of Treasury Laws Amendment (Measures 3 for a later sitting) Bill 2019 that will disregard the market value substitution rule in s 116-30 to the extent it would increase the capital proceeds for the purposes of the downsizer provisions. Broadly, if enacted, this amendment will result in the actual consideration constituting the capital proceeds. This change is proposed to take effect from the date of royal assent of this Bill and is therefore not retrospective.
In kind or in specie contributions
Downsizer contributions may be able to be made as an in-specie contribution; for example, if the capital proceeds have been used to purchase an asset (such as listed securities and business real property acquired at market value), that asset can be contributed.
Naturally, the prohibition against related party acquisitions in s 66 of the Superannuation Industry (Supervision) Act 1993 (Cth) must be complied with. As noted, listed securities and business real property acquired at market value are the key exceptions to this prohibition.
Proceeds and Borrowings
It is important to note that the downsizer contributions cap is the lesser of $300,000 or the sum of the capital proceeds. Any debt outstanding on a mortgage over the relevant property is not considered for the purpose of determining the capital proceeds.
For example, Peter bought his main residence 14 years ago for $1 million. He then sells it for $1.25 million when his outstanding borrowings are $1 million.
Peter received capital proceeds of $1.25 million. Thus, he can make downsizer contributions of up to $300,000.
Members should also be aware that downsizer contributions are not deductible.
SMSF Deed Provisions
As the downsizer contribution is a relatively new type of contribution, the SMSF’s deed should have express wording that allows members to make these contributions to the fund, especially as a member over 65 years may not be gainfully employed and in many cases a member may be in excess of 75 years (and prior to 1 July 2018 contributions could not generally be made for members over 75 years under reg 7.04 of the Superannuation Industry (Supervision) Regulations 1994 (Cth)). Additionally, the SMSF deed should provide appropriate mechanisms to resolve what happens when a downsizer contribution is deemed ineligible by the ATO.
Financial product advice
Naturally, since superannuation advice can readily fall within financial product advice unless you fall within a relevant exemption, non-licensed advisers need to ensure they comply with the relevant Australian financial services licence (‘AFSL’) requirements of the Corporations Act 2001 (Cth). One method of minimising risk here is to recommend your client in writing to obtain advice from an adviser with an AFSL before proceeding with your advice with an appropriate disclaimer.
For a prior article on this topic refer to How will downsizer contributions work for SMSFs?
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This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional.
For more information regarding how DBA Lawyers can assist in your SMSF practice, visit
11 September 2019