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Understanding the CGT main residence exemption – an important part of Downsizer

In the first year of downsizer contributions, 2018-19, there was $1b contributed under the new contribution cap¹. Since its introduction there’s been $9.4b of downsizer contributions, with a split of 55% female and 45% male². With the eligibility age for downsizer dropping from 65 to 60 on 1 July 2022 and that it is not subject to an individual’s total superannuation balance, it provides an opportunity for older Australians to transfer retirement savings into the concessionally taxed superannuation environment.

The premise behind downsizer contributions was to reduce pressure on housing affordability. Prior to the introduction of the measure contribution restrictions and caps prevented some older Australians from making contributions to superannuation from the proceeds of downsizing their homes that no longer met their needs. The measure provided an avenue to contribute those proceeds into superannuation and from the previously mentioned statistics, it appears to have been well utilised by many older Australians.

Amongst the eligibility criteria for downsizer is the requirement for the proceeds from the sale of the qualifying home to be either fully or partially exempt from income tax under the CGT main residence exemption or would have been entitled to either a full or partial exemption where the qualifying home is a pre-CGT asset. Given only a partial CGT exemption is required, there will be scenarios where an individual will qualify for making a contribution under the downsizer measure even though the property they have sold is not the home that they were actually living in at the time.

Let’s consider the following example which is based on an ATO example³ of a property, which the individual does not live in at the time of sale, which qualifies for a partial CGT main residence exemption:

Example

James:

  • bought a house in Brisbane on 15 September 2011 and moved in immediately.
  • moved to Perth on 10 October 2014 and rented out his Brisbane house.
  • bought and moved into a new house in Perth on 3 October 2019.
  • sold the house in Brisbane on 1 March 2022.

When he completed his 2021–22 tax return, James decided to treat the Brisbane house as his main residence for the period after he moved out in October 2014 until he purchased his new main residence in Perth in October 2019. This is a period of less than 6 years. This means James is entitled to claim a partial main residence exemption under the ‘six-year rule’.

As James decided not to treat the Brisbane house as his main residence after he bought the Perth house, he is subject to CGT for that period. This means James must include a capital gain or loss in the period not covered by the main residence exemption in his 2022 tax return (from October 2019 until March 2022).

The entitlement to a partial CGT main residence exemption is only one of the requirements for eligibility to make a downsizer. Whilst it appears that the property meets the 10 year ownership requirement, other factors would need to be checked, such as his age at the time of making a contribution, to determine James’ entitlement to use the separate downsizer cap for a contribution. However, it is important to be able to correctly apply the CGT main residence exemption rules to ascertain whether this valuable exemption can be claimed. Even where James was not eligible for making a contribution under downsizer, he would still benefit from a partial CGT main residence exemption and a reduced personal tax bill.

Accurium will be presenting a special 90 minute tax webinar on the topic of applying the CGT main residence exemption on July 26, 2022. Presented by experienced tax professional Karen Goodfellow, the session will cover:

  • the definition of main residence, including the two hectare rule.
  • the rules that extend the exemption, including the absence rule.
  • rules that limit the exemption, such as using the house to generate assessable income.
  • calculating the gain in circumstances where a full exemption is not available.

This will be a valuable Accurium CPD+ event for those who advise on personal income tax as well as those who work in super. To register for this webinar, go to the Accurium website and select CPD+ from the menu or click here. Are you an Accurium TecHub subscriber? Make sure you obtain your discount code and apply when registering.

Following this webinar on August 16, 2022, will be a 60 minute webinar focusing on downsizer contributions. With the eligibility age for downsizer contributions having been reduced from 65 to 60 from 1 July 2022, it’s a great opportunity to review the eligibility rules, the effect of the reduction to the eligibility age and what strategies it provides to individuals to maximise their retirement benefits and minimise their overall tax.

Another valuable Accurium CPD+ event, you can register by going to the Accurium website and selecting CPD+ or by clicking here. Again, Accurium TechHub subscribers are entitled to a discount.

1.Media release by Michael Sukkar, Assistant Treasurer, 28 June 2019
2.Senator Jane Hume, Minister for Superannuation, Financial Services and the Digital Economy video presentation to SMSF Association National Conference, Adelaide 20-22 April 2022.
3.ATO website Quick Code (66030).

Upcoming webinars

Disclaimer
The information in this document is provided by Accurium Pty Limited ABN 13 009 492 219 (Accurium). It is factual information only and is not intended to be financial product advice, tax advice or legal advice and should not be relied upon as such. The information is general in nature and may omit detail that could be significant to your particular circumstances. While all care has been taken to ensure the information is correct at the time of publishing, superannuation and tax legislation can change from time to time and Accurium is not liable for any loss arising from reliance on this information, including reliance on information that is no longer current. Tax is only one consideration when making a financial decision. We recommend that you seek appropriate professional advice before making any financial decisions.