Downsizer super contributions scheme

The legislation implementing ‘downsizer contributions’ has passed parliament and received royal assent on 13 December 2017.

What are they? Downsizer contributions allow clients aged 65 and over to make super contributions of up to $300,000 per person from selling their main residence.

The intention of the legislation 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.

At a high level:

  • 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.
  • The new measure applies to contributions from the proceeds of contracts exchanged on or after 1 July 2018.
  • The key benefit of downsizer contributions will be the ability to invest sale proceeds in the concessionally taxed super environment when over age 65 without having to meet the work test or contribution caps.
  • 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.

How do I know if I am eligible?
For a contribution to qualify as a downsizer contribution:

  • Contracts for the sale of the your main residence must be exchanged on or after 1 July 2018.
  • You 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 you, their spouse, or your 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).
  • You 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.

You 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.

What if my Total Superannuation Balance is over the cap?
Downsizer contributions are not impacted by the client’s total superannuation balance as they are not classified as non-concessional contributions. Therefore even with a total superannuation balance exceeding $1.6 million, you are able to make downsizer contributions.

However, once the downsizer contribution has been made, it may impact the ability to make future non-concessional contributions as it increases the your future total superannuation balance.

What are the Downsizer Contribution Caps/Limits?
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 proceeds 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.

What happens if I make a contribution and it is deemed not to meet the Downsizer Contribution eligibility criteria?
It is expected that a client 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.

IMPORTANT: Potential Centrelink and Aged care impacts
By making downsizer contributions a client may potentially receive less social security benefits or increase their cost of aged care (or both). Make sure you think through the potential impacts of making this type of contribution and if you are unsure then seek advice.

How can we help?
If you have any queries, require assistance or would like to clarify any particular details relating to the downsizer super strategies then please feel free to give us a call to arrange a time to meet so that we can discuss your particular circumstances.

 

Post contributor:

Pete Pennicott headshot-Pekada
Pete Pennicott
Financial Planner @ Pekada

Disclaimer: The information provided on this website is general in nature and does not constitute advice. You need to consider with your financial situation and your particular needs prior to making any strategy or products decision. Pekada will endeavour to update the website as needed. However, information can change without notice and Pekada does not guarantee the accuracy of information on the website, including information provided by third parties, at any particular time Unless otherwise specified, copyright or information provided on this website is owned by Charter Financial Planning. You may not alter or modify this information in any way, including the removal of this copyright notice.

Wealth Collective trading as Pekada (ABN 95 624 612 684), corporate authorised representative (CAR), number 1263725, is authorised to provide financial services on behalf of Communitas Wealth Pty Ltd.

The information provided on this website is general in nature and does not constitute advice. You need to consider with your financial situation and your particular needs prior to making any strategy or products decision. Pekada will endeavour to update the website as needed. However, information can change without notice and Pekada does not guarantee the accuracy of information on the website, including information provided by third parties, at any particular time Unless otherwise specified, copyright or information provided on this website is owned by Communitas. You may not alter or modify this information in any way, including the removal of this copyright notice.