Issue 11 - SMSF Wealth Newsletter - March 2018
As part of the Government's strategy to reduce pressure on housing affordability, downsizer superannuation contributions (DSC) received royal assent on 13 December 2017 and will come into effect on 1 July 2018 to provide an incentive for super fund members aged 65 years or older to sell their main residence.
Members intending to make downsizer contributions can enter into a contract of sale for their main residence from 1 July 2018 and can then contribute up to a maximum of $300,000 per member to their super fund out of the proceeds of selling their home.
The maximum contribution is actually the sale proceeds of the home but capped at $300,000 per member, therefore, if a couple sell their home for $500,000 they would only be able to contribute the $500,000 to super as a combined maximum whereas if the same couple sell their home for $700,000 they would be able to contribute the maximum of $300,000 per member.
There are many measures that restrict the amount of super Australians can have to fund their retirement but now that this legislation has passed, Australians who could not maximise their contributions throughout their working life will be allowed to boost their superannuation balances after they have finished working by selling their main residence.
There are seven reasonably broad conditions that a member must satisfy to make a DSC, however, there is no definition of downsizing nor any requirement to actually downsize the main residence at all, the member might in fact buy a more expensive home or even none at all.
Eligibility for making a DSC is not affected by a person's total superannuation balance or whether they are working. It is only governed by the following seven conditions:
- The member must be 65 or older at the time the contribution is made to a complying super fund (there is no requirement to be 65 when the home is sold or at settlement, only at the time the contribution is made – there are time limits for making the contribution after sale – see condition 5 below).
- The contribution 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 (a qualified dwelling in Australia must have been a fixed structure, it will not include houseboats, caravans or other mobile homes, even if they were a main residence).
- 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 (The 10 year ownership condition is flexible and covers situations where one member of a couple may not have been shown on the title of the property sold, a property was used for both business and principle place of residence, a person has owned a property for less than 10 years as a result of having had a former residence compulsorily acquired).
- Any gain or loss on the disposal of the dwelling would have qualified for the main residence CGT exemption in whole or part, that is, it includes properties that have a mixed-use, such as business and main residence.
- The contribution must be made within 90 days of the date the ownership changed, typically this will be 90 days from the settlement date.
- The member must choose to treat the contribution as a DSC and notify their super fund, in the approved form, of their choice at the time the contribution is made – the contribution can be made in multiple individual amounts from the sale of the one main residence not exceeding $300,000 per member (or the sale proceeds, if less).
Upon the super fund's receipt of the DSC form, the super fund must inform the ATO as part of their annual reporting. The ATO will then verify the amount contributed and may contact the member for further information.
- The member cannot have had DSCs in relation to an earlier disposal of a main residence..
If the ATO verifies that the member has made an eligible DSC, no further action will be required. However, if the DSC does not qualify, the ATO will notify the super fund. The amount will then either be allocated as a non-concessional contribution (if the member's super balance is less than $1.6 million) or refunded to the member.
As the DSC is a new form of contribution, the super fund's deed should have express wording that allows members to make these contributions to the fund, especially as a member over 65 years may not be gainfully employed and in many cases a member may be over 75 years (and to date contributions cannot generally be made for those members). Additionally the super fund deed should provide appropriate clauses to resolve what happens when a DSC is deemed ineligible by the ATO.
Members should also consider that selling their main residence and contributing DSCs to their super fund may adversely impact on any Centrelink entitlement and Aged Care Fees. The Age Pension and Aged Care are assessed against an asset or income test. The family home is not included in the assets test for social security purposes but superannuation savings are included once a member reaches pension age. Therefore, a member's Age Pension entitlement may be reduced or they may no longer be eligible to receive any age pension at all.
It is also important to note that any mortgage outstanding over the relevant property is not considered when determining the capital proceeds. For example, Mary bought her main residence 11 years ago for $300,000. She then sells for $400,000 when her outstanding mortgage is $200,000. Mary's capital proceeds are $400,000, therefore, Mary can make a DSC up to $300,000.
These downsizer contributions are not tax deductible and they do not count towards the member's contribution caps or total superannuation balance in the financial year a DSC is made.
If you have a Self Managed Superannuation Fund with us, you can view reports and information online through Simple Fund 360.
Useful features of this software include the Pension Dashboard. It can be used to view pension payments to date, and minimum and maximum pension payment limits for all members.
Various investment reports are also available for investment returns, market values, and market movement.
Interim reports depend on information received from various sources including automatic feeds, brokers and members, which may not be entirely correct prior to the completion of annual accounts.
Please contact us if you are interested in having access.