SMSFs cautioned on ‘danger zone’ with downsizer strategies
With the downsizer eligibility age now much lower, professionals need to be extra careful where downsizer and non-concessional contributions are being used simultaneously, says a technical expert.
Speaking in a recent webinar, Smarter SMSF chief executive Aaron Dunn said with the eligibility age for making downsizer contributions now reduced to age 55 as of 1 January, there may be an increase in contribution stacking strategies.
While for some clients delaying downsizer contributions until later in the future may be a better strategy, Mr Dunn said there be some clients with lower balances that want to get a very large amount into super.
Clients 55 and older now have an opportunity to contribute $630,000 into super in the one year or $1.26 million for a couple, he noted.
“So, if someone is looking to get as much money into super as they can with a low balance, then it may be beneficial to lock those two things together,” he said.
However, Mr Dunn warned that with the bandwidth for getting the strategy wrong much greater than it’s ever been, it’s important that SMSF professionals pay close attention to the eligibility criteria for making these contributions, particularly where there is a non-concessional contribution strategy in play at the same time.
He noted that where a downsizer contribution doesn’t meet the qualifying contributions, it will be reclassified as a non-concessional contribution.
“Let’s say for example that for some reason the downsizer contribution doesn’t meet one of the qualifying conditions. Perhaps the sale didn’t meet the 10-year main residence exemption. That means the contribution will now be treated as a non-concessional contribution,” he explained.
“If the downsizer contribution was made at a time when we were also undertaking a non-concessional contribution strategy we’ve now got a very big problem either with excess contributions or just triggering the bring-forward rule when we didn’t want to.”
Mr Dunn explained that in the past, downsizer contributions were only available from age 65 and non-concessional contributions were only available through to age 67.
“There is now a much wider danger zone as you can make downsizer contributions from age 55 and you can make non-concessional contributions through to 75 years of age.”
“So that is now the window that if we don’t meet certain conditions that issues around the contribution being treated as an NCC come into play.”
Mr Dunn noted while combining various contribution strategies and stacking them can create some great opportunities for clients, there are important bits and pieces that SMSF professionals need to be conscious of.
Miranda Brownlee is the deputy editor of SMSF Adviser, which is the leading source of news, strategy and educational content for professionals working in the SMSF sector.
Since joining the team in 2014, Miranda has been responsible for breaking some of the biggest superannuation stories in Australia, and has reported extensively on technical strategy and legislative updates.
Miranda also has broad business and financial services reporting experience, having written for titles including Investor Daily, ifa and Accountants Daily.