Expert SMSF insights
Contributing property proceeds to super
By Mark Ellem
Access to a new type of personal super contribution is available from 1 July 2018 – the ‘downsizer’ contribution. It gives older Australians the opportunity to transfer money into super after reaching 65 without an overly complex set of rules.
The downsizer has been introduced as an incentive for older Australians to move from homes that no longer meet their needs, in order to make more homes for younger Australians available. Whilst the name downsizer implies a shift to a smaller home, there’s actually no requirement for it to be smaller than the original. In fact, there’s no requirement to even replace the home that has been sold. So, an eligible couple could sell the family home, contribute to super and, if they wished, simply travel around Australia as grey nomads without a care in the world.
Here are the requirements to qualify for this new type of personal contribution:
For homes sold post July '18
The contract to sell the home must be entered into on or after 1 July 2018 – but, be careful if contemplating selling the family home now. Proceeds from the sale of a contract signed before 1 July 2018 will not be eligible for the downsizer, even where settlement occurs on or after 1 July 2018.
At the time of the contribution, the contributor must be at least age 65 – note, it’s the age when the contribution is made and not the age at contract or settlement date that matters. This allows, for example, a person to sign a contract when aged 64 and still make a downsizer contribution, provided they are 65 when they make the contribution and the contribution is made before the expiration of the prescribed period (see below for the prescribed period to make the contribution).
The downsizer must be no more than the maximum allowed – the downsizer contribution cap (yes, another cap!) is the lesser of:
- The proceeds of the sale; and
- $300,000 per person
Here’re some examples:
Homer and Marge sell their family home for $1.4m and both are eligible for the downsizer contribution. They can contribute a maximum of $300,000 each.
Ned and Maude sell their family home for $500,000 and are eligible to make a downsizer contribution. They can make a maximum combined contribution of $500,000, with no more than $300,000 for anyone one of them.
90 day contribution window
Any downsizer contribution must be made within 90 days after the change of ownership (the prescribed period in which to make the downsizer contribution). Change of ownership usually occurs at settlement date. The Commissioner can allow a longer period, if necessary.
The home sold (including the land it is built upon) must be located within Australia and is not a caravan, houseboat or other mobile home.
10 year ownership
The home must have been owned for at least 10 years by the contributor, their spouse, or former spouse. This allows the home to be held either solely, jointly, or as tenants in common. It also allows for the death of one spouse during the 10-year ownership period.
As an example:
One person can own the home for the required 10-year period and their spouse may have owned it for a short period, say, the last 12 months. The spouse, of only 12 months, will be eligible for a downsizer contribution, as their spousal partner has owned the home for at least 10 years.
Where a person has purchased a vacant block of land and then sometime later builds a home on it, the 10-year period commences once the spouse has legal ownership of the land, again, this is usually the settlement date.
To qualify for the downsizer, the home must qualify under the CGT main residence exemption or would have qualified, if it is a pre-CGT asset (acquired prior to 19 September 1985). The home will also qualify where the CGT main residence exemption only partially applies. This will allow a property that is not currently the family home to qualify for exemption. For example, a property that was the main residence, but is now being rented out or a property that had the family home on it and was also used to conduct a business from.
The downsizer – what super rules don’t apply?
Some super rules don’t apply to downsizer contributions. The downsizer is not a non-concessional contribution which means:
- There is no total super balance test – a person who has at least $1.6m in total super at 30 June prior, has a non-concessional cap amount of zero. However, for a downsizer contribution, this test is disregarded. So, those with more than $1.6m in total super and who qualify, can make a downsizer contribution.
- The ‘work test’ does not have to be met. Anyone at least age 65 when the downsizer contribution is made does not need to satisfy the annual work test of 40 hours of gainful employment in 30 consecutive days, which is required for a non-concessional contribution.
- There is no upper age limit for making downsizer contributions, so it can be made even if the contributor is 75 or over.
Application of total super balance
We have mentioned previously that the total super balance test does not apply when making the downsizer contribution. However, once it’s been accepted by the fund it’s included in the calculation of the total super balance, which is relevant to non-concessional contributions. Consequently, the timing of making a downsizer contribution is important if the goal is to maximise super contributions. This was highlighted in a recent presentation by SuperConcepts’ Graeme Colley and in turn covered by selfmanagedsuper magazine.
One off application
A downsizer contribution is a once off opportunity, that is, it applies to the sale of one qualifying home only. Even if a person only uses part of the $300,000 cap, from the sale of one qualifying home, a further downsizer contribution is not available when they sell another qualifying home. However, a person can make multiple downsizer contributions for the same property, within the prescribed period of 90 days after settlement.
Included in tax free portion
Whilst a downsizer contribution is not a non-concessional contribution by someone 65 or over, it is included in the tax-free component of any benefit payment, which can be important for estate planning purposes. Further, the downsizer cannot be claimed as a personal income tax deduction.
Don’t forget the form!
There’s paper work to be completed for a downsizer contribution. An eligible contributor must make the choice that the contribution is a downsizer contribution and complete the approved form (a form to be issued by the ATO). Further, and importantly, the form must be given to the superannuation fund before or at the time the downsizer contribution is made.
Are there Centrelink ramifications?
A good reason to keep the family home is that it is as an exempt asset for the Centrelink Asset Test purposes. This helps to maximise a person’s entitlement to the age pension. While the downsizer contribution rule allows older Australians to contribute to super any proceeds from the sale of their home, once in super it will not be exempt from the Centrelink Asset test. That is, any proceeds from the sale of the family home contributed to super, will effectively be transferred from an asset test exempt asset (the family home) to an asset tested asset (superannuation). Consequently, for those receiving the Age Pension, there is no incentive to utilise the downsizer contribution rule and from a Centrelink perspective, it’s a disincentive.
What’s the real benefit of the downsizer contribution?
In the end, making a downsizer contribution from the sale of the family home is about being able to transfer capital to a tax structure, superannuation. In that structure, tax on investment earnings is limited to a maximum of 15%.
If the contributor has not fully used their transfer balance cap, which restricts the amount that can be transferred into retirement phase, they can further reduce the tax on income in the fund to nil by commencing an account-based pension. However, if the contributor has already used all their transfer balance cap, the tax benefits of transferring the amount to superannuation will depend on their personal tax rate and whether it’s more than 15%. With the transfer balance cap in place, there is a need to take a holistic view of a client’s tax affairs. It’s no longer as simple as getting it all into super, starting a pension on everything and having a zero-tax rate for the fund, as well as for the individual.
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