From 1 July 2022, if you are 60 years old or older and meet the eligibility requirements, you could make a downsizer contribution into your superannuation of up to $300,000 from the proceeds of selling your home.
About the downsizer measure
Your downsizer contribution is not a non-concessional contribution and will not count towards your contributions caps. The downsizer contribution can still be made even if you have a total super balance greater than $1.6 million.
That means your downsizer contribution will not affect your total super balance until your total super balance is re-calculated to include all your contributions, including your downsizer contributions, on 30 June at the end of the financial year.
The downsizer contribution will, however, count towards your transfer balance cap, currently set at $1.6 million. This cap applies when you move your super savings into retirement phase.
There is no legislative requirement to purchase a home of a lesser value or to purchase a new home at all. As long as the sold home meets the eligibility criteria, an individual is eligible to contribute an amount up to the value of the sale proceeds or $300,000 (whichever is lesser) as a downsizer contribution. This allows for flexibility and downsizer contributions can be made where an individual wishes to move into a retirement community, aged care facilities or move in with their family.
You can only make downsizing contributions for the sale of one home. You cannot access it again for the sale of a second home.
The home sold must have been owned by the individual for the past ten or more years and have been the principal residence of the individual. Both members of a couple can contribute to super under this policy from the proceeds of the sale.
For a contribution to be a downsizer contribution in respect of an individual, the following conditions must be satisfied:
- the individual must be aged 65 years or older at the time the contribution is made (age 60 from 1 July 2022);
- the contribution must be in respect of the proceeds of the sale of a qualifying dwelling in Australia;
- the maximum amount of the downsizer contribution for any individual cannot exceed $300,000;
- the 10-year ownership condition is met;
- any gain or loss on the disposal of the dwelling must have qualified (or would have qualified) for the main residence capital gains tax (CGT) exemption in whole or part;
- the contribution must be made within 90 days of the disposal or such longer time as allowed by the Commissioner;
- the individual must choose to treat the contribution as a downsizer contribution, and notify their super fund in the approved form of this choice at the time the contribution is made;
- the individual cannot have made downsizer contributions in relation to an earlier disposal of a main residence.
The period of the 10-year ownership condition is calculated from the day ownership of the dwelling commenced to the day it ceased. This ownership period would usually be from the settlement date of the original contract to purchase the dwelling to the settlement date of the later contract.
The main residence CGT exemption
To qualify for the CGT main residence exemption, the property must be considered your main residence for all or part of the ownership period. There is no requirement for your dwelling to be their main residence for 10 years, only that you would receive either a partial or main residence exemption for a period before the disposal.
Whether a dwelling qualifies as a main residence depends on the facts and circumstances of each case. The ATO will generally take the following factors into consideration:
- the length of time you have lived there (note, there is no minimum time a person has to live in a home before it is considered to be their main residence);
- whether your family lives there;
- whether your personal belongings are situated there;
- where your mail is being delivered;
- your address on the electoral roll;
- the connection of services (eg phone, gas or electricity) to the dwelling;
- your intention to occupy the dwelling.
Therefore, if the investment property was your main residence at some point during the ownership period and qualifies for at least a partial CGT main residence exemption, it meets the downsizer contribution qualification criteria.
Where the property qualifies for a partial exemption, there is no need for the sale proceeds to be apportioned so that only the capital proceeds relating to the sale of the owner’s main residence can be used to make a downsizer contribution.
To be eligible to downsize you must not have entered into a contract (signed a contract) prior to 1 July 2018. If you sign a contract before 1 July 2018 you will not be eligible. The settlement date is relevant for downsizers to determine their ownership period and they need to make the contribution within 90 days of receiving the proceeds of the sale (which is usually settlement date). You must complete and submit the ATO Downsizer Contribution form to your super fund when you make the contribution.
A downsizer contribution will also continue to count towards the Age Pension tests. This will need to be considered in any contribution strategy as a principal home is generally an exempt asset for the purposes of these tests, however, a downsizer contribution will be counted as a superannuation asset. (Once a member reaches age pension age the superannuation investments will count towards the income and assets tests for Centrelink purposes).
Be wary of getting it wrong
The ATO points out that penalties and compliance action may be applicable where taxpayers are not supplying the correct information to the regulators.
“False and misleading penalties may be applied if we identify that your downsizer contribution was not eligible and you had incorrectly declared that you were eligible to make such a contribution,” the ATO has said.
Where the tax office becomes aware of an eligibility breach, both the taxpayer and the super fund will be notified. An assessment will then be made as to whether the contribution could have been made as a personal contribution. If the contribution could be accepted under the relevant contribution rules, the amount will count towards the relevant contribution cap. If not, the contribution will be returned to the taxpayer.
As such, it is always important to seek guidance from your accountant prior to making a downsizer contribution to your SMSF. Contact the team at NumberSuper if you would like to know more.