New laws give rise to Part IVA issue with downsizer contributions

DBA Lawyers director Daniel Butler cautioned SMSF professionals and their clients that a section within new legislation may have ramifications for anyone who has made downsizer contributions from deemed capital proceeds. 

Mr Butler warned that section 292-102(3A) of the new legislation precludes a spouse seeking to contribute deemed capital proceeds to the extent it has the effect of increasing those capital proceeds. 

“This broadly results in a downsizer having to be funded via cash,” he said.

“Spouse-to-spouse transfers are quite common and there may have been spouses who may have made a downsizer contribution in whole or part from deemed capital proceeds.”

Mr Butler explained that under section 116-20 of the ITAA97, if a dwelling is transferred from a “transferor” spouse to a “transferee” spouse for no consideration, the transferor is still, for CGT purposes, deemed to have received the market value of that asset.

Conversely, the “transferee” spouse obtains a cost base equivalent to the market value deemed to have been paid under s 112-20 ITAA97. 

One or both spouses may decide to use the transfer of title as leverage to put other money from savings or the transfer of listed shares into super by way of a downsizer contribution, he said.

“So, under s 116-20, [the spouse] is deemed to have received capital proceeds and some people may have taken advantage of that and made a contribution relying on the deemed capital proceeds rule,” he explained.

“However, from the 23rd of June, you cannot leverage off the capital proceeds strategy, you need to put in cash or other consideration such as listed securities or business real property.”

He also pointed out that the ATO has previously sought to squash this strategy in LCR 2018/9, long before this legislative fix was made.

“Accordingly, anyone who has made a downsizer contribution from deemed capital proceeds prior to 23 June 2020 could be subject to adjustment and penalties by the ATO under Part IVA, unless they have a sound position to defend themselves,” he warned. 

“These people should review their positions and seek expert tax advice and decide whether they need to have their position documented or lodge a self-amendment to their tax positions.”