"Downsizing" contributions to Superannuation
In the May 2017 Federal Budget the Government announced that, effective 1 July 2018, individuals aged 65 or over would be able to make a contribution to super of up to $300,000 from the proceeds of selling their main residence, subject to the home being owned by the individual or their spouse for at least ten years.
There are a number of contribution restrictions and caps that prevent senior homeowners from investing the proceeds of a home sale into super, and the downsizing contributions are not subject to the restrictions mentioned below that that typically apply to non-concessional contributions (NCC):
- A downsizing contribution does not need to meet the "work test"; it can be made regardless of whether the individual is working or not.
- The upper age limit applicable to normal NCC contributions of 75, does not apply to downsizing contributions - there is no upper age limit.
- The downsizing contribution is not subject to the total super balance test which is applied when determining eligibility to make a NCC contributions - hence, once a downsizing contribution is made, it will increase an individual's total super balance.
- A downsizing contribution is not a considered a NCC contribution and does not count towards the NCC cap (currently $100,000 per annum, or $300,000 if two years are also brought forward)
Eligibility to make a Downsizing contribution
The following conditions must be met in order for a contribution to qualify as a "downsizing contribution":
1. The individual making the contribution must be aged 65 or older at the time the contribution is made - so, you could potentially sell your property just prior to age 65 and still qualify.
2. In terms of the property being sold:
- The contract for sale (not the settlement date) must have been entered into on or after 1 July 2018.
- The property must be located in Australia and cannot be a houseboat, caravan or other mobile home.
- The property must have been owned by the individual, or their spouse, for 10 or more years just prior to disposal. This means the property is not required to be owned by both members of a couple making a contribution.
- The property must qualify for the main residence capital gains tax (CGT) exemption, in whole or part. It does not need to be a current home, and it could be an individual's former home which has been used as an investment property, or left vacant. As long as a property is eligible for at least a partial main residence CGT exemption, this property is able to satisfy this condition - but this may present a problem for expatriates returning to Australia given recent legislation.
- There is no requirement to actually downsize or purchase another home.
- The contribution must be made within 90 days of the change in ownership (i.e. settlement) and a choice must be made by the individual to treat a contribution as a downsizing contribution using an approved form.
- Deductibility - a downsizing contribution cannot be claimed as a deduction.
There are some clear situations where this flexibility will be advantageous but we strongly recommend professional advice with respect to eligibility and also the impact on any pensions being received or pending.