In the recent Federal Budget, the Government proposed expanding eligibility to make downsizer contributions to those age 60 and over (from 65 and over) allowing more individuals from 1 July 20221 to utilise these rules to contribute to super.
Downsizer contributions do not count towards the concessional or non-concessional contribution caps, making them useful in helping to maximise retirement savings in a concessionally taxed environment. They can also be used to help increase the effectiveness of certain strategies such as re-contribution strategies where there are no surplus proceeds after the downsize.
Since their introduction on 1 July 2018, there has been clarification from the ATO around certain eligibility rules and in this article, we discuss these recent developments as well as some of the nuances that individuals should be aware of when utilising these rules.
The eligibility requirements
Currently, individuals will need to satisfy the following requirements to be able to make downsizer contributions:
Eligibility for the downsizer measure
An individual will be eligible to make a downsizer contribution to super if they can answer yes to all of the following:
- they are 65 years old or older at the time they make a downsizer contribution (there is no maximum age limit);
- the amount they are contributing is from the proceeds of selling their home where the contract of sale exchanged on or after 1 July 2018;
- their home was owned by themself or their spouse for 10 years or more prior to the sale – the ownership period is generally calculated from the date of settlement of purchase to the date of settlement of sale;
- their home is in Australia and is not a caravan, houseboat or other mobile home;
- the proceeds (capital gain or loss) from the sale of the home are either exempt or partially exempt from capital gains tax (CGT) under the main residence exemption, or would be entitled to such an exemption if the home was a CGT rather than a pre-CGT (acquired before 20 September 1985) asset;
- they have provided their super fund with the downsizer contribution into super form either before or at the time of making the downsizer contribution;
- they make the downsizer contribution within 90 days of receiving the proceeds of sale, which is usually at the date of settlement; and
- they have not previously made a downsizer contribution to their super from the sale of another home.
Note: If their home that was sold was only owned by one spouse, the spouse that did not have an ownership interest may also make a downsizer contribution, or have one made on their behalf, provided they meet all of the other requirements.
The Government has proposed changing the age requirement to age 60 from age 65 from 1 July 2022. All other requirements are expected to remain unchanged.
How much can be contributed?
The amount an individual can contribute under the downsizer contribution provisions is not governed by their concessional or non-concessional caps (or their total super balance) and can be made in addition to these contributions. Downsizer contributions also do not affect an individual’s transfer balance cap (unless they subsequently commence a retirement phase income stream) or require the work test to be satisfied before the contributions are made.
However, downsizer contributions do count towards an individual’s total super balance. This can impact the individual’s ability to make non-concessional contributions or catch- up concessional contributions in the future.
Once the rules are met, the amount that can be contributed is capped at the lesser of:
- $300,000 for each individual; and
- the gross capital proceeds received (before any mortgage repayments or costs incurred from the sale such as agent fees).
For example, if a couple received $800,000 from the sale of an eligible property, they can each contribute up to $300,000 as a downsizer contribution. If their property was instead sold for $500,000, the most they could contribute is $500,000 between them, up to $300,000 for each spouse (the combination does not matter) i.e. each could contribute $250,000 or have one spouse contribute $300,000 and the other $200,000.
Although contributions can only be made in respect of one eligible property (regardless of how much was contributed), multiple contributions can be made for that property (to different superannuation funds for example) if they are made within the above cap and timeframe (90 days).
Can an in-specie downsizer contribution be made instead of cash proceeds?
An individual can make a downsizer contribution as an in-specie contribution, provided the value of the assets do not exceed required limits, i.e. does not exceed $300,000 or the gross capital proceeds received from the sale.
This has been confirmed in the ATO’s Law Companion Ruling (LCR 2018/19).
For example, an individual sells their home for $1 million. They meet all the eligibility requirements to make a downsizer superannuation contribution. Instead of using the cash proceeds from the sale of their home, the individual can choose to transfer their individually owned portfolio of listed shares into their SMSF if:
- the value of the shares does not exceed $300,000;
- the shares are transferred after the ownership interest in the dwelling is disposed of; and
- the transfer was within 90 days of receiving the sale proceeds.
What if the property had been built for less than 10 years?
To make a downsizer contribution in respect of an eligible property, an individual will generally need to have owned the property for at least 10 years. This ownership period would usually be from the settlement date of the initial contract to purchase the dwelling, to the settlement date of the contract to sell the dwelling.
An individual can also be eligible to make a downsizer contribution without an ownership interest in a dwelling if their spouse holds an ownership interest in that dwelling (for example, where a couple’s main residence is only owned by one spouse). However, the spouse that does not hold the ownership interest must also meet the other requirements to be able to make a downsizer contribution for themselves including the main residence exemption.
There are also special provisions to allow periods where land is vacant, for example due to the property having been destroyed or knocked down and another built, to continue to satisfy the 10-year ownership condition. This also extends to a vacant block that was bought and then later a dwelling is built on and lived in as an individual’s main residence.
For example, an individual bought a vacant block of land in 2008. In 2016, a dwelling was built and the individual resided in the property as their main residence for five years. In 2021, the dwelling is sold and qualified for a partial main residence CGT exemption. Subject to meeting all other requirements, the individual can make a downsizer contribution as the 10-year ownership test is satisfied even though a dwelling wasn’t present for the entire 10 years.
What if the land was subdivided?
Downsizer contributions can also be made in situations where land (with a dwelling on it) is subdivided and both lots were sold together (with the dwelling).
Subdividing land generally splits the interest into separate assets but does not give rise to a CGT event based on section 112.25 of the Income Tax Assessment Act 1997 (Tax Act).
To satisfy the downsizer rules in these situations, an individual needs to ensure there is a disposal of an ownership interest in a dwelling and the main residence exemption requirement is met.
The ATO has confirmed in their LCR 2018/9 that both these conditions can be satisfied where the subdivided land is adjacent land to the main residence, and is sold at the same time, and to the same person as the other lot with the dwelling.
If the vacant subdivided land was sold on its own, it would not have satisfied the disposal of an ownership interest in a dwelling nor the main residence exemption requirements.
What if the trustees of a deceased estate disposed of the ownership interest instead of the individual?
There are provisions in the Tax Act relating to downsizer contributions that provides:
‘For the purposes of determining whether an individual held an interest at a particular time, if the interest was held at the particular time by the trustee of the deceased estate of an individual who was your spouse when the individual died, the interest is taken to be held at the particular time by that individual.’
This means the surviving spouse can not only include the ownership period of their deceased spouse but can also include the period the dwelling is held by the trustee of the deceased estate towards the 10-year ownership requirement.
It also means that just because the trustee (and not the individual) sold the property, it doesn’t preclude the surviving spouse from making a downsizer contribution, subject to all the other requirements being met.
What if only part of the home was sold?
One of the key eligibility requirements to make a downsizer contribution is that ‘the contribution is an amount equal to all or part of the capital proceeds received from the disposal of an ownership interest in a dwelling’.
The explanatory memorandum accompanying the legislation clarifies that the meaning of ‘ownership interest in a dwelling’ includes an interest as a joint tenant or an interest as a tenant in common.
This means although other parties may also hold an ownership interest in the dwelling, it doesn’t prevent an individual from making a downsizer contribution in relation to the sale of their own interest.
Additionally, in August 2020, the ATO clarified in a private ruling relating to DomaCom’s equity release product that an individual does not need to sell their entire property to be eligible to make a downsizer contribution. A sale of part of their home is sufficient to meet the rules, including a part sale under DomaCom’s equity release product.
However, it is important to note that the amount that can be contributed is still limited to the sale proceeds (or $300,000, whichever is lower), and although multiple contributions can be made in respect of one eligible property (within 90 days), this does not extend to ownership interests in the same property that are sold at a later time (for example, because of the sale of part of the ownership, or where there has been a sale and re-acquisition of the same dwelling).
What if the home was in a retirement village?
The requirement to dispose of an ownership interest in a dwelling can also be satisfied where the sale is in relation to an interest in a retirement village.
Although a retirement village arrangement often involves a long-term leasehold interest, the definition of ‘ownership interest in a dwelling’ in the Tax Act is broad enough so that the disposal of such an interest can allow an individual to make a downsizer contribution.
Based on the definition in the Tax Act, an individual is taken to have an ownership interest in s dwelling if:
- for a dwelling which is not a flat or home unit, they have legal or equitable interest in the land on which the dwelling is erected or a licence or right to occupy it; or
- for a flat or home unit, the individual has
- a legal or equitable interest in a stratum unit, or
- a licence or right to occupy it, or
- a share in a company that owns a legal or equitable interest in the land on which the flat or home unit is erected and that it gives them a right to occupy it.
However, it is important that the retirement village accommodation does not meet the definition of a caravan, houseboat or other mobile home (for example, transportable homes where the person owns the property but leases the land on which it stands) as these are specifically excluded by the downsizer contribution legislation.
What happens if the downsizer contribution is ineligible?
If the ATO determine that a downsizer contribution does not meet all the eligibility requirements, they will notify the super fund that received the contribution.
The super fund will then treat the contribution as a member contribution and assess whether the contribution can be accepted under the usual super contribution rules contained in SIS Regulation 7.04 – age requirements and work test.
For example, for clients who are age 67 to 74 and have satisfied the work test (i.e. eligible to contribute), the fund can retain the contribution. This means, the individual may exceed their non-concessional cap if they have contributed $300,000 and are unable to trigger the non-concessional contribution bring-forward provisions.
If the super fund is unable to accept the contribution, for example, if the person is over age 75 or does not satisfy the work test, the super fund will return the contribution to the individual.