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$300,000 downsizing contribution

27/07/2017

This measure was part of the May 2017 budget changes.  The basic details are that individuals who are home owners can from the proceeds of sale of their principal place of residence, each contribute up to $300,000 to superannuation.  This special superannuation contribution will not be affected by the work test and can still be made even if they have a total superannuation balance of $1.6m or more.

However there are a number of preconditions.  First, the sale of the principal place of residence must occur after 1 July 2018; Secondly, the member making this special contribution must be aged 65 or more.  Thirdly, the principal place of residence must have been held for 10 or more years.  Finally, the downsizing contributions can be made even if the total superannuation balance already exceeds $1.6m.

While the legislation is yet to be enacted one matter is clear:  these special contributions will still be included in the transfer balance cap: that is, they are included within the $1.6m transfer balance.  So while downsizer contribution is prevented from being made by reason of the $1.6m balance rule, they are not exempted from the transfer balance cap.

Example

Bill and Mary are eligible to make downsizer contributions of $300,000 each.  They are both age 76 and have not worked for many years.  They each have a pension balance of $1.6m and, because of the recent changes, they each have an accumulation balance of $100,000.  

Bill and Mary can still each make $300,000 of downsizer contributions.  It is irrelevant that they don’t satisfy the age and work tests for superannuation contributions (these tests will be modified to ensure that the tests do not apply to downsizer contributions).  It is also irrelevant that they have a total super balance in excess of $1.6m (again the rules imposing a nil non-concessional contributions cap if your total superannuation balance exceeds $1.6m will also be amended).  However there will be no amendment of the transfer balance cap.  Consequently as they each have exhausted their transfer balance cap, the $300,000 can only increase their accumulation accounts and not their pension accounts.

Some key details are now known:  such there will be a 90 day period for making the downsizer contribution.  This period will run from the date of disposal of the home.  In general (unless the ATO decides to allow an extension) if the contribution is made more than 90 days after the disposal, it cannot qualify as a downsizer contribution.  Also, it is not clear whether the downsizing contributions have to be sourced from the proceeds of sale or simply that an amount of up to $300,000 can be contributed within 90 days of the sale where the sale proceeds equal or exceed the contribution.

While this measure (if and when enacted) may be beneficial – in that up to $300,000 could be contributed to super in circumstances where the contribution could not otherwise be made due to either the work test, age test or the $1.6m total super balance test – it will result in value (currently embedded in the family home and as such, immune from capital gains tax and Centrelink testing) moving to an environment where any earnings on the value will be subject to tax (if the transfer balance cap space is nil) and will be exposed to the Centrelink means test.

Consequently, this measure may be beneficial to some but not all super members.