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Downsizer contributions

28/09/2017

Downsizer contributions are superannuation contributions which have been sourced from the sale proceeds of the current or former principal place of residence of a taxpayer (or their spouse).  The Government is currently amending the tax and superannuation legislation to permit such contributions to be made.

The policy justification for such contributions is to remove a barrier which restricts older taxpayers (ie those aged 65 or more) from downsizing their place of residence.  By removing a barrier the Government hopes to reduce pressure on the housing market.  

It is intended that the changes permitting downsizer contributions will apply from 1 July 2018.  From this date, a taxpayer can apply up to $300,000 from the proceeds of the sale of their principal residence as a superannuation contribution for themselves or for their spouse.  The contribution can only be made if the beneficiary of the contribution is aged 65 or more at the time the contribution is made.  This contribution will be a non-concessional contribution.  The contribution can be made despite not satisfying the age work test and despite having no or insufficient “NCC cap space” (because their total super balance equals or exceeds $1.6m or is just under the $1.6m level).  However, downsizer contributions will form part of the total superannuation balance and will also be counted for the purposes of the transfer balance cap and so will affect the amount of non-concessional contributions which can be made in the future.  In short, downsizer contributions will have a similar treatment to CGT non-concessional contributions.

In order to make a downsizer contribution, the taxpayer must dispose of a property which satisfies two ownership requirements: the first is that there must be a disposal of an “ownership interest”, which must have been continuously held for 10 years or more prior to its disposal; the other ownership requirement is that the ownership interest relates to real estate which must have had the benefit of the principal place of residence exemption (in whole or in part) or would have been entitled to such exemption but for the fact that the real estate is a pre CGT asset.  

Additionally, the contribution must generally be made within 90 days of the sale of the ownership interest.

Where the ownership interest is held by one spouse and not both spouses, then the spouse holding the ownership interest could make a downsizer contribution for themselves and also make a downsizer contribution for their spouse.  The age requirement applies to the taxpayer who is the beneficiary of the contribution and not to the maker of the contribution.

Downsizer contributions are not tax deductible and they cannot be subject to a contribution split.  They will form part of the tax free component of the superannuation interest.

The beneficiary of the downsizer contribution must elect that the contribution be treated as a downsizer contribution.  If, after making the election, it is subsequently determined that the contribution does not qualify as a downsizer contribution, then the contribution will be treated as a non-concessional contribution (and given that the beneficiary of the contribution is over age 65) will be treated in whole or in part as an excess non-concessional contribution (depending on the NCC cap space of the beneficiary of the contribution).

The principal negative feature of downsizer contributions is that $300,000 (or $600,000 if a couple) will be transferred from a tax exempt and Centrelink test exempt environment to a possibly taxed and Centrelink tested environment.  Consequently, making downsizer contributions may have a materially adverse impact on the entitlement to the age or veterans pension.  Before any downsizer contributions are made, careful consideration will have to be given to the age /veterans pension implications of making such contributions.