By Peter Kelly, Retirement Strategies and Solutions
In November 2017, the Government passed legislation that will allow certain individuals who sell their main residence to contribute up to $300,000 of the sale proceeds to superannuation, without being constrained by the usual restrictions that otherwise apply to contributions – including contribution caps.
The legislation is designed to reduce the pressure on housing affordability.
Contributions made to superannuation under this arrangement are referred to as ‘downsizer contributions’ and are subject to specific rules. Downsizer contributions are treated separately to concessional and non-concessional contributions.
How it works
To be eligible to make downsizer contributions, several conditions need to be met, including:
- Contributions may only be made by an individual aged 65 or over;
- The contributions arise from the sale of a residence that has, at some or all of the time of its ownership, qualified as the individual’s main residence for Capital Gains Tax purposes;
- The residence has been owned by the individual and/or their spouse for at least ten years;
- The contribution of up to $300,000 is made from the sale proceeds of the residence within 90 days of change of ownership (settlement);
- The contract for sale of the property was entered into on or after 1 July 2018;
- An election to make a downsizer contribution is made in the approved form; and
- The individual has not previously made a downsizer contribution.
To qualify as a downsizer contribution, the sale proceeds from which the contribution is to be made must be in respect of the sale of a property that has, at some time during its ownership, qualified for a Capital Gains Tax exemption as the individual’s, or their spouse’s main residence.
Therefore, the sale proceeds from the sale of a commercial property, or an investment property that has never qualified for the main residence Capital Gains Tax exemption, do not qualify as a downsizer contribution.
Furthermore, a qualifying residence does not include a houseboat, caravan or mobile home.
Making a downsizer contribution is contingent upon selling a qualifying residence. However, there is no requirement that a replacement residence must be purchased. For example, a person selling their home and planning to rent a property, relocate to a retirement village or residential aged care facility, or move in with family, may still make a downsizer contribution.
How are contributions treated?
A downsizer contribution will be treated as part of the contributor’s tax-free component of their superannuation. Therefore, it will not be subject to tax at the time the contribution is made to the super fund.
Contributions to superannuation by individuals aged 65 or older can only be made where the individual meets a work test. Furthermore, contributions can generally only be made to age 75.
However, individuals wishing to make downsizer contributions are not subject to the work test or age 75 requirements.
While non-concessional contributions are subject to several restrictions including an annual limit of $100,000, and cannot be made by people with more than $1.6m in super, these restrictions do not apply to downsizer contributions.
Downsizer contributions are counted towards an individual’s total superannuation balance. This may impact on their ability to make future non-concessional contributions and receive other Government benefits such as the Government co-contribution and a tax offset for contributions they may make for an eligible spouse.
Transfer balance cap and taxation
The superannuation reforms that were introduced from 1 July 2017, restrict the amount that an individual may transfer to a superannuation pension account. This is known as the transfer balance cap. The transfer balance cap is currently $1.6m.
Consequently, even though an individual may be able to make a downsizer contribution, the contribution may not be able to be transferred to a pension account where the individual has already exhausted their transfer balance cap.
Whether it is worth retaining downsizer contributions in a superannuation accumulation account, as opposed to investing the surplus funds outside super, will depend on the individual’s personal tax position.
An individual’s main residence is generally exempt from the assets and income test when assessing entitlement for Social Security and Department of Veterans Affairs benefits, including the age pension or service pension.
However, selling the main residence and depositing the surplus sales proceed to a bank account, allocating to other investments, or making a downsizer contribution to superannuation may result in amounts that have previously been exempt from the assets and income tests now being assessed under these tests. This may result in the loss of, or a reduction in the amount of pension being paid.
Fred and Francis are aged 68 and 66 respectively. They have owned their family home for more than 10 years. They list their home for sale in May 2018 and enter a contract to sell the home for $900,000 in July 2018. They are planning to buy an apartment for $500,000. The surplus arising from the sale of their main residence is $400,000. They could each make a downsizer contribution of $200,000, or any other combination, subject to a maximum of $300,000 per individual.
If Fred and Francis are receiving an age pension, the surplus proceeds from the sale of their main residence ($400,000) will be treated as an assessable asset and will result in their age pension reducing or ceasing to be payable, depending on their overall financial position.
Making a downsizer contribution to super as a result of these changes will be a viable strategy for some, and perhaps not so viable for others.
Whether it is suitable or not will depend on personal circumstances including the current amount held in super, personal tax position, and whether an individual is receiving social security or DVA benefits.
Superannuation can be extremely complex. Therefore, before embarking on making downsizer contributions, suitable advice should be sought from a licensed financial planner.