Downsizer contributions – what you need to know about the new contribution cap20 February 2018 Topics: Superannuation, Professional advisers, Tax and revenue
From 1 July 2018, there is a new contribution cap – the downsizer contributions cap.
Although this cap is designed for people downsizing their main residence, it can be used in much wider circumstances than that.
The downsizer cap is in addition to the other caps, and is available regardless of the amount of money the member already has in superannuation. (It does not matter if the contributor’s total superannuation balance is over $1.6 million).
The cap can only be used once, and the maximum amount that can be contributed under the downsizer cap is $300,000 or the actual sale proceeds from the property, whichever is lesser.
There are a number of conditions:
- The contributor must be 65 years or more.
- The contribution must be all or part of the capital proceeds received from the sale of an ownership interest in a dwelling in Australia, which is not a caravan, houseboat or other mobile home.
- The contributor or their spouse must have owned the interest just before the disposal.
- At least some of the capital gain must have been disregarded under the main residence CGT rules.
- The contribution must be made within 90 days after the change of ownership occurs.
- The contributor, their spouse or former spouse must have owned an interest in the property for the 10 years prior to the sale.
A few very interesting points:
- There is no requirement to actually ‘downsize’, or even buy other property. The property sold also need not have been the main residence immediately before the sale. It is enough that the property at some stage was used as a main residence. This means the sale of an investment property that at one stage was a main residence could qualify to allow some of the proceeds to be contributed to superannuation under this cap.
- It is not necessary that a new ‘downsized’ property be bought, or any new property at all.
- The property does not have to be owned by the contributor. It could be owned by the spouse or the member for whom the contribution is made. This could potentially allow up to $600,000 to be contributed for a couple under this cap. It is also not required that the money goes into super based on the ownership interest in the property that has been sold.
- There is no requirement that the proceeds of sale are actually used to fund the superannuation contribution. For example, if the sale proceeds were used to pay out a debt, other funds from other sources could be used to fund the contribution.
As an example, it is 31 July 2018 and Malcolm and Lucy have just sold their family home for $5M. They are both aged over 65 and have owned the house for 20 years. The entire capital gain is tax-free as their main residence. They are buying into an aged care facility, using $2.5M of the sale proceeds to fund the purchase. They can each put $300,000 into superannuation within 90 days of settlement of the sale using the downsizer contribution cap.
As a slightly more complex example, in July 2019 Chloe sells a property that has been rented out by her for the last nine years. After she split from her first husband 12 years ago, she lived in the property for the next three years and so the capital gain qualifies as partly exempt from CGT under the main residence rules. The sale proceeds are $900,000. Chloe can contribute $300,000 into superannuation using the downsizer contribution cap for herself, and also for her current spouse, Bill. Bill has never lived in the property (both are aged over 65).
In both examples, it does not matter how much they already have in superannuation, or whether they are gainfully employed at all.
Downsizer contributions provide an additional opportunity for people aged over 65 to make contributions to superannuation, in vastly wider circumstances than it may appear.
If you would like any further information about downsizer contributions, please contact a member of our superannuation team.
This will be among the topics we discuss at our Annual SMSF Conference on 15 March. Click here for more details.