Getting money into super
From 1 July 2018, individuals aged 65 and over are able to contribute up to $300,000 of the sale proceeds from the sale of their (or their spouse's) main residence into super. Downsizer contributions can be made regardless of the other contributions caps and restrictions that might apply to making voluntary contributions i.e. age restrictions or work test requirements.
Downsizer contributions are not non-concessional contributions and do not count towards any contributions caps. As a result, downsizer contributions can still be made if an individual has a total super balance of $1.6 million or more.
Downsizer contributions are not included in an individual's total super balance until it is re-calculated to include all contributions, including downsizer contributions, on 30 June at the end of the financial year. This may affect the individual's ability to make non-concessional contributions in the following financial year. For more information on total superannuation balance.
Once a downsizer contribution has been made, it forms part of the tax free-component of the individual's accumulation phase superannuation interest. Subject to the transfer balance cap, an individual may be able to convert downsizer contributions into a retirement phase income stream including an account based pension.
Individuals cannot claim a deduction for any contributions that they choose to treat as downsizer contributions. However, this restriction does not apply to any other contributions that an individual otherwise makes in respect of the proceeds of selling their main residence.
As with all types of contributions, a superannuation provider does not have to accept a downsizer contribution if it does not meet their trust deed rules.
An individual is eligible to make a downsizer contribution to superannuation if they satisfy all of the following:
- Age 65 or over at the time of the contribution. There is no upper age limit.
- Amount of contribution is from sale proceeds of a qualifying main residence where the contract of sale was exchanged on or after 1 July 2018.
- Main residence was owned by the individual, their spouse or former spouse for 10 years or more prior to the sale. This is regardless of whether the ownership interest as held solely, joint tenants or tenants in common.
- Contribution must be made to a complying superannuation fund within 90 days of the change of ownership (or a longer time allowed by the Commissioner of Tax).
- The individual must provide the super fund with a downsizer contribution form either before or at the time of making the downsizer contribution. If multiple downsizer contributions are made to the same fund or different super funds, a form must be provided for each contribution.
- Must not have previously made a downsizer contribution into super from the sale of another home.
It is important to note that even though the contributions are called "downsizer contributions", there is no obligation to subsequently purchase a new residence or purchase a new residence of a lower value.
Downsizer contribution amounts
If eligible, an individual can make a downsizer contribution up to a maximum of $300,000. For couples, each spouse may make maximum downsizer contributions of $300,000. This means a couple can contribute up to $600,000 of sale proceeds into super between them.
The contribution amount cannot be greater than the sum of the following:
- the individual's share of the sale proceeds
- the individual's spouse or former spouse's share of the proceeds
- less the sum of any downsizer contributions already made to a complying super fund in respect of the individual or their spouse.
Dave and Lisa are spouses who are both aged 67. They sell their main residence for $500,000. Assuming all other eligibility criteria are met, the maximum contribution both can contribute cannot exceed $500,000 in total. This means they can choose to contribute half ($250,000) each, or split it - for example $300,000 for one and $200,000 for the other.
If instead, Dave is aged 60, Lisa will not be eligible to make a downsizer contribution. In this case the maximum amount of downsizer contribution Dave can make is $300,000.
The proceeds may in some cases relate to proceeds from a property where only part of the property is the owner's main residence, e.g. where part of the dwelling is used in a business and the owner lives in the other part. In this case, the sale proceeds are eligible to be contributed under the downsizer contribution rules (assuming they meet all other eligibility criteria), there is no need to apportion the sale proceeds to the portion that refers to their main residence.
Qualifying main residence
Amounts eligible to be downsizer contributions must be sourced from the proceeds of the sale of a main residence. There are several eligibility requirements concerning the main residence:
- The main residence must be a dwelling located in Australia that is not a caravan, houseboat or other mobile home.
- The dwelling will qualify as a "main residence" for downsizer contribution purposes if any capital gain or loss from the sale of the dwelling is:
- Eligible for a full or partial CGT main residence exemption, or
- Would be eligible for a full or partial CGT main residence exemption, except for the fact that it was acquired before 20 September 1985. If dwelling is wholly owned by the spouse of the individual who's making the downsizer contribution, the dwelling would be a qualifying main residence if the individual would have been able to disregard wholly or partially the capital gains under the main residence exemption provision if they had owned the dwelling for a period before the disposal.
Dwellings owned by a company or trust cannot qualify for the main residence CGT exemption and therefore won't be a qualifying main residence for downsizer contributions.
To qualify for a full or partial CGT main residence exemption, the property must have a dwelling on it and the individual must have lived in it for all or part of its ownership period. A vacant block of land or an investment property the individual never lived in won't qualify.
Generally, a dwelling is considered to be the main residence of a person if:
- The person and their family live in it
- The person's personal belongings are in it
- It is the address that the person's mail is delivered to
- It is the address on the electoral roll, and
- Services such as gas and power are connected.
Whether a dwelling is a main residence of a person is not based on one factor alone, and is determined based on the individual's circumstances. Relevant factors also include the length of time the person stayed in the property and their intention in occupying it.
A person would qualify for a full CGT main residence exemption if the dwelling:
- Has been the home of the person, their partner and other dependants for the whole period they've owned it
- Has not been used to produce assessable income - that is they've not rented it out or run a business from it, and
- Is on land of two hectares or less.
- If a dwelling was the main residence for part of an individual's ownership period, the capital gain or loss is only disregarded for the period it was their main residence.
If a dwelling is wholly owned by the spouse of the individual who's making the downsizer contribution, the dwelling would be a qualifying main residence if the individual would have been able to disregard wholly or partially the capital gains under the main residence exemption provision if they had owned the dwelling for a period before the disposal.
The individual doesn't have to be residing in the property immediately prior to its disposal to qualify for a downsizer contribution. For a property to qualify under the downsizer contribution rules, the dwelling needs to qualify for either a full or partial main residence exemption under the CGT provisions of the Tax Act.
Therefore, if a property is an investment property at the time of disposal, as long as it is the individual's main residence at some point during the ownership period and qualifies for at least a partial CGT main residence exemption, it meets the 'qualifying main residence' qualification criteria.
10 year ownership period condition
To make a downsizer contribution, the individual and/or their spouse or former spouse must have had an ownership interest in the dwelling for 10 years just before the sale. This 10 year period is generally measured from the settlement date when the dwelling was acquired to the settlement date of the sale of the main residence.
In the event that only one spouse holds an ownership interest in the dwelling, but the other spouse does not, both individuals will be eligible to make a downsizer contribution as long as the other spouse continues to meet all other eligibility requirements.
If there has been a change in ownership between two spouses over the 10 year period that preceded the sale of the dwelling, e.g. due to a relationship breakdown, downsizer contributions can be made in respect of the person who held the ownership interest just before disposal (and in respect of another person who is their spouse at that time). This is provided the original two spouses held an ownership interest in the dwelling at all times during the period.
Where a spouse who held an ownership interest dies, the surviving spouse can count the period of ownership of their deceased spouse (including the period the dwelling is held by the trustee of the deceased estate) towards the 10 year ownership test.
Applying to the ATO for an extension to the 90 day rule
All downsizer contributions must be made to the individual's super fund within 90 days after change of ownership. Change of ownership generally occurs at the date of settlement.
Individuals can apply to the ATO and request a longer period for making a downsizer contribution where a delay has been caused by factors outside of their control.
However, the ATO will not extend the timeframe where the timing of the sale is within the contributor's control. For example, the ATO is unlikely to exercise its discretion to extend the timeframe if a 64 year old decides to sell a dwelling that would otherwise qualify for the downsizer contribution, but it will be more than 90 days from the date of settlement until they turn age 65.
Individuals can seek a review of any decisions the Commissioner makes in allowing a longer period (eg if they are dissatisfied with the length of the extension), or a decision the Commissioner makes not to allow a longer period.
What if a downsizer contribution was made and later found to be ineligible?
The ATO will monitor the legitimacy of downsizer contributions made by individuals. Superannuation funds will report any downsizer contributions to the ATO through its normal contribution reporting process. Data is being matched with information from the State Land Titles Offices, which is provided quarterly. If the Commissioner finds that a contribution does not satisfy all the requirements of a downsizer contribution, it is expected that the ATO will write to the individual in respect of whom the contribution was made and ask them to provide further information that the ATO should have taken into account.
If the ATO remains of the view that a downsizer contribution does not satisfy all the requirements to be a downsizer contribution, the ATO must notify the superannuation fund that received the contribution. Once notified, the super fund trustee will assess whether they could otherwise have accepted the contribution from the member based on their age or their working status.
If an individual is ineligible to make super contributions (eg does not satisfy the work test), the super fund trustee must return the contribution to the individual within 30 days of being notified by the ATO. When returning the contribution, the super fund trustee may also return an amount that reflects investment outcomes (eg gains or losses that the account made after the contribution was accepted) net of administrative costs. If a contribution is returned to a member, the super fund will also re-report or amend any previous report they had provided to the ATO.
The ATO has indicated that penalties for providing false and misleading information may apply if an individual incorrectly declares they are eligible to make a downsizer contribution.
Last modified: Tuesday, July 23, 2019