Does the downsizer contribution have any appeal?

Indeed, Michael Sukkar, Minister for Housing and Assistant Treasurer, in his press release dated 28 June 2019 confirmed that:

Older Australians downsizing from their family homes have contributed $1 billion to their superannuation funds, building up retirement incomes and freeing up housing for younger families, Minister for Housing and Assistant Treasurer Michael Sukkar announced today.

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• 4,246 individuals have utilised the downsizer measure;
• 55 per cent of contributions have been made by females and 45 per cent by males;
• Individuals from every state and territory have made downsizer contribution, with the top three states being NSW (31 per cent), Vic (26 per cent) and Qld (24 per cent).

This article examines how downsizer contributions work. This is an important strategy for advisers, and there has not been much education especially for the tax advisers and accountants on downsizer contributions, and that’s why I’m writing this article. In particular, a sound understanding of the tax provisions driving the downsizer contributions is beneficial.

How do downsizer contributions work?

There are three broad steps, as outlined below, that need to be followed for a member to be eligible to make downsizer contributions. The downsizer contribution criteria are largely contained in section 292–102 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997).

Step 1: Eligibility

The first step the member needs to take is to confirm that the amount they wish to contribute will constitute eligible downsizer contributions. Broadly, an eligible downsizer contribution is where:

1. The contribution is made to a complying super fund by a member aged 65 years or older;
2. The amount is equal to all or part of the “capital proceeds” received from the disposal of an ownership interest in a dwelling that qualifies as a main residence in Australia, under the downsizer provisions;
3. The member or the member’s spouse had an interest in the main residence before the disposal;
4. The interest in the main residence was held by the member, the member’s spouse, the member’s former spouse or a trustee of the estate of the member’s deceased spouse during the 10 years prior to the disposal; and
5. The member has not previously made downsizer contributions in relation to an earlier disposal of a main residence.

A member’s ownership interest in a dwelling must be held by the individual or their spouse. The ownership interest in the dwelling being sold (i.e. broadly, a legal or equitable interest, or a right or licence to occupy the dwelling) must be held by the individual (in respect of whom a downsizer contribution is being made) and/or their spouse, just before the disposal.

The member should determine whether they are eligible to make downsizer contributions and whether their main residence satisfies the above criteria prior to the disposing of their main residence in order to make a downsizer contribution.

Note that a caravan, houseboat or other mobile home does not qualify as a main residence for these purposes. Thus, the grey nomads travelling around Australia in their luxury motor homes, caravans, houseboats or yachts will not be eligible.

Step 2: Contributions

Upon the sale or disposal of a main residence, a member can make up to a maximum of $300,000 in contributions to their super fund above their usual concessional and non-concessional contribution caps in the relevant financial year. A downsizer contribution must not exceed the lesser of $300,000, or the total capital proceeds that the individual, their spouse, or they both receive from disposing of their ownership interests in the dwelling.

Further, there is no age limit or gainful employment test that needs to be satisfied (however, many SMSF deeds prepared prior to 30 June 2018 preclude such contributions and an SMSF deed update may be required).

Moreover, downsizer contributions are not counted towards the relevant member’s contributions caps or total superannuation balance (TSB) in the financial year a downsizer contribution is made. The $1.6 million (indexed) total superannuation balance restriction (which applies to, among other things, determine an individual’s eligibility for non-concessional contributions) does not apply in respect of downsizer contributions in the financial year the downsizer contribution is made. Thus, a member could have, say, $2 million in super and still make a downsizer contribution.

Once the member sells their main residence, they are required to make downsizer contributions to their super fund within 90 days after the day the ownership changed (typically 90 days from settlement).

Given this 90-day time frame, a member cannot make downsizer contributions if settlement is, for instance, on vendor terms or a settlement date that goes beyond the 90-day period unless they have been granted an extension from the ATO.

While multiple downsizer contributions in respect of the sale of the same residence can be made, as noted above, the total amount of downsizer contributions made by each member cannot exceed the lesser of the total capital proceed or $300,000. This total amount includes the amount of all downsizer contributions a member makes in respect of all of their superannuation funds.

It is important to note that the maximum $300,000 downsizer contribution cap is for only one member, and therefore, this allows for a couple to contribute up to $600,000 (i.e. 2 x $300,000).

Step 3: Reporting and verification

Upon the super fund’s receipt of the downsizer contribution form, the super fund must inform the ATO during the super fund’s annual reporting. The ATO will then run verification checks on the amount and may contact the member for further information.

An approved form should be completed by the contributing member(s) and given to the trustee of the super fund detailing the amount that is to be attributed to downsizer contributions.

If the ATO has verified that the member has made eligible downsizer contributions, no further action is taken.

However, if the contribution does not qualify as a downsizer contribution, the ATO notifies the superannuation provider. The amount will then either be allocated as a non-concessional contribution — if permitted by superannuation law and may result in the member exceeding their cap — or refunded to the member in due course. Expert advice should be obtained if the contribution fails to satisfy the downsizer criteria, as there are special rules for dealing with excess contributions and a hasty withdrawal of the contribution may give rise to further consequences.

Daniel Butler, director, DBA Lawyers