Downsizer contributions allow people aged 65 and over to make super contributions of up to $300,000 per person from selling their main residence. The intention of the legislation1 is to encourage retirees to move out of large houses and free up housing stock, however retirees need to carefully consider the tax, social security and aged care implications before taking advantage of the proposed scheme. We have prepared an overview below with the help of our technical support team at Colonial First State. While the main parts of the new rule seem simple enough its important to seek advice because as you will see below, there are a number of things to consider.
Clients age 65 or over may make one or more superannuation contributions (called ‘downsizer contributions’) from the proceeds of selling their main residence, up to $300,000 each.
The new measure applies to contributions from the proceeds of contracts exchanged2 on or after 1 July 2018.
However, retirees need to consider the impacts on their social security entitlements and possibly aged care fees as funds invested in superannuation under these rules are assessed as financial investments.
The following outlines the key features of the ‘downsizer contributions’ scheme.
For a contribution to qualify as a downsizer contribution:
- Contracts for the sale of the person’s main residence must be exchanged on or after 1 July 2018.
- The person must be aged 65 or over at the time of the contribution, but no other age or work tests apply. For example, a retired person aged 80 may be eligible to make downsizer contributions.
- The contribution must be sourced from the proceeds of the sale of one qualifying main residence.
- Either the person, their spouse, or their former spouse (or a combination) had an ownership interest in the main residence for at least 10 years immediately prior to the sale.
- The contribution must be made within 90 days of the change of ownership of the main residence (or a longer time allowed by the Commissioner).
- The person must notify the super fund trustee in the approved form of the choice to treat the contribution as a downsizer contribution at the time the contribution is made.
- The person cannot make a downsizer contribution if they have made a downsizer contribution(s) in relation to the sale of a different main residence in the past.
- It is important to note that even though the contributions are called ‘downsizer contributions’, there is no obligation to subsequently purchase a new residence.
TOTAL SUPERANNUATION BALANCE
Downsizer contributions are not impacted by the person’s total superannuation balance as they are not classified as non-concessional contributions. Therefore people with a total superannuation balance exceeding $1.6 million are able to make downsizer contributions.
However, once the downsizer contribution has been made, it may impact the person’s ability to make future non-concessional contributions as it increases that person’s future total superannuation balance.
DOWNSIZER CONTRIBUTIONS NOT TAX DEDUCTIBLE
People will not be able to claim a tax deduction on any contribution they have elected to be a downsizer contribution.
DOWNSIZER CONTRIBUTIONS CAP
Downsizer contributions are limited to the lesser of:
- $300,000 per person, less any downsizer contributions already made to that person’s superannuation fund from the sale of the same main residence, or
- capital proceeds3 received by a person (and their spouse, if relevant) from the sale of a main residence, less any downsizer contributions already made in respect of that person and their spouse (if relevant) from the sale of the same main residence.
For couples, each spouse may make maximum downsizer contributions of $300,000. This means a couple may invest up to $600,000 of sale proceeds in super between them.
John and Rose jointly own their main residence which they sell for $400,000.
John makes a downsizer contribution of $300,000 to his super fund. This means that the maximum that Rose can contribute as a downsizer contribution is $100,000, as the total downsizer contributions cannot exceed the total capital proceeds.
David and Rhonda are spouses who are both age 67. They sell their main residence which was owned by David for $1.2 million. The settlement date of the sale is 1 September 2018.
David and Rhonda may each make one or more downsizer contributions (to one or more of their own super funds) totalling no more than $300,000 each. These contributions would have to be made within 90 days of 1 September 2018.
David and Rhonda then purchase a beachside cottage in Rhonda’s name which they live in as their main residence. Upon the sale of this beachside cottage several years later, neither David nor Rhonda could make a downsizer contribution as they have both made downsizer contributions in relation to another main residence in the past.
QUALIFYING MAIN RESIDENCE
Amounts eligible to be downsizer contributions must be sourced from the proceeds of the sale of one main residence. There are several eligibility requirements concerning the main residence:
- The main residence must be a dwelling located in Australia that is not a caravan, houseboat or other mobile home. This includes up to two hectares of adjacent land on the same title.
- The dwelling will qualify as a ‘main residence’ for downsizer contributions if any capital gain or loss from the sale of the dwelling is:
- eligible for a full or partial CGT main residence exemption4 or
- would be eligible for a full or partial CGT main residence exemption, except for the fact that it was acquired before 20 September 1985.
- proceeds from the sale of an investment property that is not eligible for any main residence CGT exemptions will not be eligible.
- The contributor or their spouse must have had an ownership interest in the dwelling for the 10 years just before the sale. This 10 year period is generally measured from the settlement date5 of the original purchase to the settlement date of the sale of the main residence. It is sufficient that one spouse held the ownership interest, as long as the other spouse meets all other eligibility requirements. It is also sufficient that either spouse held an ownership interest in the dwelling during the 10 year period (this acknowledges situations where one spouse passes away).
- Contracts for the sale of the main residence must be exchanged on or after 1 July 2018.
Alan and Joyce were married and had purchased a home together (as joint tenants) in 2008. In 2015 Alan and Joyce decided to separate. At the time neither of them wanted to sell so they agreed to both move out and rent their home until they were ready to sell.
In 2019 Alan and Joyce finalise their divorce and sell their former home as part of the property settlement. At the time Alan is 68 and Joyce is 53. Under the tax laws Alan and Joyce are both entitled to a partial main residence CGT exemption.
Despite the fact that the home was not his main residence at the time of sale, Alan may contribute up to $300,000 of the proceeds to super as a downsizer contribution.
However, Joyce cannot make a downsizer contribution as she is still under age 65. Alternatively, she could use the proceeds to make a non-concessional or concessional superannuation contribution, utilising her non-concessional or concessional cap space.
WHAT HAPPENS IF THE CONTRIBUTION IS NOT A DOWNSIZER CONTRIBUTION?
It is expected that a person will need to declare that they meet the requirements of making a downsizer contribution on the approved form. The super fund trustee will also be required to report downsizer contributions to the Australia Taxation Office.
If the Commissioner becomes aware that the contribution does not satisfy all the requirements to be a downsizer contribution they will notify the fund. The fund will then need to refund the contribution if the person otherwise would not have met the age and work test requirements to contribute to super. The fund’s contribution reporting will then be amended.
Alternatively, if the client was eligible to make non-concessional contributions, the fund trustee will re-report the contribution as a non-concessional contribution.
POTENTIAL SOCIAL SECURITY AND AGED CARE IMPACTS
By making downsizer contributions a person may potentially receive less social security benefits or increase their cost of aged care (or both).
The legislation for downsizer contributions does not specify any related changes to the social security or aged care assessment laws of superannuation interest, therefore the social security and aged care impact of a downsizer contribution will need to be considered.
For social security purposes the principal home (which includes certain adjacent land) is an exempt asset, regardless of its value.
If a person, aged 65 or over, uses some of the proceeds from the sale of their main residence to make a downsizer contribution to super, that amount is effectively converted from being asset test exempt (when it was invested in the family home) to being asset tested as a superannuation accumulation interest.
The assessment of super accumulation interests is dependent on the age of the owner and whether the funds are accessible. If the client is Age Pension age, super in the accumulation phase is generally assessed as a financial investment for the assets test and is subject to deeming for the income test.
If the downsizer contributions are subsequently invested in an account-based income stream, that income stream is similarly assessed for the assets test and subject to deeming for the income test.6
So, depending on the person’s personal situation, having more money in super, rather than a main residence may reduce their Centrelink benefits.
If a person is planning to sell their main residence and they are already in or entering aged care, it is important to consider the impact on any Centrelink benefits they are receiving/may receive, and the impact on their ongoing cost of care.
A person’s aged care costs are impacted by their ‘means tested amount’ which determines whether they pay an accommodation payment or an accommodation contribution and their ongoing ‘means tested care fee7’.
For aged care purposes, the former home is generally assessed at the capped amount of $159,631.20 unless a ‘protected person’ resides in the home. There may also be exemptions on the assessment of rental income where the person first entered aged care prior to 1 January 2016.
By selling the former home and using the proceeds to make a downsizer contribution to super, the amount of that contribution is effectively converted from being substantially asset test exempt for aged care purposes (if a protected person was living in the former home or the home was worth significantly more than $162,815.20) to being included in the client’s means tested amount when it is invested in super. It will also be subject to deeming.
In addition, when someone enters aged care the former home is exempt under the social security asset test for two years from the date of entry (and may be eligible for the indefinite exemption1 if they first entered aged care prior to 1 January 2017). By selling the former home and contributing the proceeds to superannuation, the person will be assessed as a non-homeowner and the amount in superannuation will be assessed as a financial investment. This may impact their rate of social security entitlements.
So, depending on the person’s situation, having more money in super, rather than a main residence may increase their ongoing cost of aged care and potentially reduce social security entitlements.
1. Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures No. 1) Act 2017
2. Exchange occurs when the contracts are signed by the vendor and purchaser and each party is given a copy of an executed contract. Proceeds from properties where the exchange of contracts occurs before 1 July 2018 will not be allowed to be made as a downsizer contribution.
3. Capital proceeds as defined in Division 116, Income Tax Assessment Act 1997, which starts with a base of the money you have received, or are entitled to receive, in respect of the CGT event and the market value of any other property you have received, or are entitled to receive, in respect of the CGT event happening. There are several modifications to ‘capital proceeds’ in Div 116 that may apply.
4. Subdivision 118-B – Main residence, Income Tax Assessment Act 1997.
5. Settlement will occur when everything that needs to be done in order for the contract to come into force, has been performed (eg payment of a deposit, cooling off period, valuations, finance, inspection reports, completion of conveyancing, pre-settlement inspection). Settlement is the day you pay the balance of the purchase price and take possession of the property (the keys and title deeds are handed over).
6. In certain circumstances where the client does not have access to the super accumulation (eg defined benefit interest where funds are not yet payable), the super accumulation interest may be exempt from means testing.
7. The means tested care fee is calculated as the lesser of:
- cost of care
- means tested amount minus the maximum accommodation supplement of $55.44pd
- annual cap of $26,566.54
- lifetime cap of $63,759.75
The information contained in this update is based on the understanding Colonial First State Investments Limited ABN 98 002 348 352, AFS Licence 232468 (Colonial First State) has of the relevant Australian laws as at the article date. As these laws are subject to change you should refer to our website at colonialfirststate.com.au or talk to a professional adviser for the most up-to-date information. The information is for adviser use only and is not a substitute for investors seeking advice. While all care has been taken in the preparation of this document (using sources believed to be reliable and accurate), no person, including Colonial First State or any other member of the Commonwealth Bank group of companies, accepts responsibility for any loss suffered by any person arising from reliance on this information. This update is not financial product advice and does not take into account any individual’s objectives, financial situation or needs. Any examples are for illustrative purposes only and actual risks and benefits will vary depending on each investor’s individual circumstances. You should form your own opinion and take your own legal, taxation and financial advice on the application of the information to your business and your clients.
Taxation considerations are general and based on present taxation laws and may be subject to change. You should seek independent, professional tax advice before making any decision based on this information.
Colonial First State Investments Limited is also not a registered tax (financial) adviser under the Tax Agent Services Act 2009 and you should seek tax advice from a registered tax agent or a registered tax (financial) adviser if you intend to rely on this information to satisfy the liabilities or obligations or claim entitlements that arise, or could arise, under a taxation law.