‘Downsizing’ the Family Home and Super Contributions

/, Insurance, Investment/Market, Superannuation/‘Downsizing’ the Family Home and Super Contributions

‘Downsizing’ the Family Home and Super Contributions

In the 2017 Federal Budget, the Government announced a proposal which is designed to encourage older Australians to free up housing stock and access equity in their home for their needs. The legislation for this proposal was introduced into Parliament on 7 September 2017 and is now law. These new measures allow a person aged 65 or older to make superannuation contributions (downsizer contributions) of up to $300,000 from the sale of an ownership interest in an Australian home where the sale contract is entered into on or after 1 July 2018.

Making downsizer contributions

Downsizer contributions must be made to a complying super fund and will not count against the concessional, non-concessional (NCC), capital gain tax (CGT) or personal injury contribution caps and will not be subject to the total super balance (TSB) cap and work test requirements. To have the contribution treated as a downsizer contribution, an approved form must be given to the super fund trustee when the contribution is made. Not all super funds will accept downsizer contributions, as it is not compulsory for them to do so. Generally, once a person reaches age 75 contributions cannot be made into super by that person or on their behalf. Downsizer contributions however, can be made by an eligible person who is aged 75 or over. A tax deduction cannot be claimed for this type of contribution and the amount will form part of the tax free component in the super fund. The contribution must be made within 90 days of the transfer of ownership, usually the settlement date, unless the person applies and receives an approved extension from the Commissioner of Taxation. Multiple downsizer contributions can be made within the allowed period as long as these relate to the same sale contract. The person will not be eligible to make further downsizer contributions from a subsequent sale of another property.

Adviser tip: While downsizer contributions are not subject to TSB cap restrictions, these contributions do count towards the person’s TSB for NCC purposes. Where downsizer contributions cause the person to breach their TSB cap the client may not have the ability to make NCCs in the following financial year.

Eligible ownership interest The ownership interest (home) in an Australian home refers to ownership of a dwelling including the land on which it sits. It may be a house, ‘semi’, unit on strata or company title, or the right or licence to occupy these types of dwellings. It does not, however, apply to caravans, mobile homes and houseboats. The home must have been owned for at least ten years by the person making the super contribution, their spouse, or by both spouses just before its disposal. The period of ownership by a former spouse will count towards this ownership period. This allows for situations where a home passes to a spouse because of a relationship breakdown or where the former spouse passed away. In addition, if a former home was compulsorily acquired and a replacement home is purchased within a required timeframe, a downsizer contribution could still be made into super when the replacement home is sold if at least ten years has passed since the former home was originally purchased.

CGT main residence exemption

The capital gain or loss from the disposal of the home must be partly or fully disregarded under the CGT main residence exemption. The requirement for at least partial main residence exemption means that the property does not need to be the main residence at the time of sale or for the whole period of ownership. If the property was acquired before 20 September 1985 (pre-CGT) it can qualify if it would have been eligible for the main residence exemption if it were a CGT asset.

Adviser tip: As long as the individual (or their spouse, if partnered) lived in it at some time during the ownership period and the main residence exemption and ten year ownership period requirements are met the home can qualify.

Example:

Contributions limited to the lesser of the cap or to amount of sale proceeds Martin and Sharon, both in their 80s, have lived in their home for 25 years. The home is jointly owned. On 1 August 2018 they sell their home for $550,000 and the settlement date is on 13 September 2018. The main residence exemption disregards all of their capital gain. Martin and Sharon make downsizer contributions of $300,000 and $250,000 respectively within 90 days of settlement. While the cap is $300,000 per person Sharon only contributed $250,000 because their downsizer contributions combined cannot exceed the $550,000. Alternatively, they may contribute $275,000 each instead.

Example:

Property owned by a spouse who is less than age 65 Roger is aged 66 and Mel is aged 63. They live in a home which Mel purchased 20 years ago. Mel sells the home for $900,000. The main residence exemption disregards all of Mel’s capital gain. Roger can make a downsizer contribution up to $300,000 within the 90 day period. Mel is not eligible to make a downsizer contribution as she is less than 65 years old.

Example:

Ex-spouse period of ownership and partial main residence exemption Jacob divorced in 2016 and received an investment property, which was owned by his ex-wife Marie since 2010, as part of the divorce settlement. Jacob lived in the property for two years and then rented it out until it sold for $600,000 in August 2021. Jacob’s capital gain can be partially disregarded under the CGT main residence exemption. Marie’s period of ownership counts towards the ten year ownership period. At the time of the sale Jacob is 66 and is eligible to make downsizer contributions up to a total of $300,000.

While the term ‘downsizing’ infers that a person will move to a smaller home, there is no requirement to purchase another home. The person may choose to move to an existing property, rent, live with their children, or move into a granny flat arrangement, retirement village, or aged care facility and still be eligible to make a downsizer contribution.

Another consideration when selling the home is social security. About 77%1 of Australians aged 65 and over receive some age pension. For many, the home will be their most valuable asset. Where the home is sold to free up capital, any excess funds will be assessed for social security purposes and can potentially impact the pension.

Adviser tip:

An investment in a long-term 0% RCV annuity has more concessional social security treatment. Only income in excess of the deductible amount is counted and the annuity will have a reducing asset balance. If the annuity is a super annuity income is also tax free. This strategy may help the person retain some of their social security pension.

Who can benefit from downsizer contributions?

Older Australians who have low super balances or none at all, or who missed out on making contributions because they didn’t have the capacity, didn’t meet the work test or were restricted by their age, NCC cap or TSB cap can make downsizer contributions if eligible. Downsizer contributions provide an opportunity for over 65s to top up their super, however care should be taken that the strategy works for them. Those on a marginal tax rate higher than 15% can benefit from downsizer contributions as this will allow their investment earnings to be taxed at 0% – 15% in super. However, those who are not expected to pay tax on investment earnings may not need to contribute to super at all. A person’s tax free threshold after SAPTO and LITO is applied should be considered when deciding the amount of downsizer contribution. Is it possible to hold some non-super investments tax-effectively and hold the rest of the funds in super?

This document has been prepared by BT Group Licensees (BTGL). BTGL is a part of BT Financial Group Pty Limited ABN 38 087 480 331, which is a subsidiary of Westpac Banking Corporation ABN 33 007 457 141. BTGL includes Magnitude Group Pty Ltd ABN 54 086 266 202 AFSL 221557 (Magnitude) and Securitor Financial Group Ltd ABN 48 009 189 495 AFSL 240687 (Securitor) who also provide licensee services as BT Select. This document may contain financial product advice and has been prepared for use by financial advisers only. It must not be made available to any retail client and any information in it must not be communicated to any retail client or attributed to any company within the Westpac Banking Corporation. It must not be copied, used, reproduced or otherwise distributed or circulated to any retail client or third party. The information contained in this publication is an overview or summary only and it should not be considered a comprehensive statement on any matter nor relied upon as such. This publication has been prepared without taking into account any person’s objectives, financial situation or needs. Because of this, you should, before acting on any information contained in this publication, consider its appropriateness to your clients, having regard to their objectives, financial situation or needs. Any taxation information contained in this publication is a general statement and should only be used as a guide. It does not constitute taxation advice and is based on current laws and their interpretation. Each individual client’s situation may differ, and your clients should seek independent professional taxation advice on any taxation matters. Any graph, case study or example contained in this publication is for illustrative purposes only, and is not to be construed as an indication or prediction of future performance or results. While the information contained in this publication may contain or be based on information obtained from sources believed to be reliable, it may not have been independently verified. Where information contained in this publication contains material provided directly by third parties it is given in good faith and has been derived from sources believed to be accurate at its issue date. It is not the intention of BTGL or any member of the Westpac Group that this publication be used as the primary source of readers’ information but as an adjunct to their own resources and training. To the maximum extent permitted by law: (a) no guarantee, representation or warranty is given that any information or advice in this publication is complete, accurate, up to date or fit for any purpose; and (b) no member of the Westpac Group is in any way liable to you (including for negligence) in respect of any reliance upon such information. This website may also contain links to websites operated by third parties (“Third Parties”) who are not related to the Westpac Group (“Third Party Web Sites”). These links are provided for convenience only and do not represent any endorsement or approval by the Westpac Group of those Third Parties or the information, products or services displayed or offered on the Third Party Web Sites.

2018-06-18T16:26:27+00:00June 18th, 2018|Financial Planning, Insurance, Investment/Market, Superannuation|Comments Off on ‘Downsizing’ the Family Home and Super Contributions