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New ATO guidance on downsizer contributions

From 1 July 2018 individuals that sell a home which is their main residence are eligible to make a ‘downsizer contribution’ of up to $300,000 from the proceeds of sale into their super, provided that certain requirements are met. The ATO recently released Law Companion Ruling LCR 2018/9 and Super Guidance Note GN 2018/2 (ATO Publications), which together provide guidance on how the ATO Commissioner will apply the “downsizer contribution” amendments to the Income Tax Assessment Act 1997 (Cth) (Downsizer Provisions). 

Bridie O'Shannessy, Maddocks Lawyers

The Downsizer Provisions allow a qualifying individual to make a contribution of up to $300,000 to their superannuation when selling a main residence which they (or their spouse) have owned for ten years ('downsizer contribution').  The ATO Publications provide guidance on the interaction between the Downsizer Provisions and contribution caps, fund acceptance rules and capital gains tax requirements.

Eligibility requirements

 In order to qualify as a downsizer contribution, a contribution must meet the following conditions:

  • be made to the complying superannuation plan of an individual who is aged 65 years or older at the time of making the contribution;
  • be sourced from the disposal of an ownership interest in a dwelling (not a caravan, houseboat or other mobile home) located in Australia held by the individual or their spouse just before the disposal;
  • any capital gain or loss from the disposal must qualify for the main residence capital gains tax exemption in whole or in part;
  • the dwelling must have been owned (either by the individual, their spouse, or former spouse) for at least 10 years;
  • the contribution must be made within 90 days of settlement of the sale;
  • the individual must choose to treat the contribution as a downsizer contribution by completing the approved form and providing it to the complying superannuation plan at or before the contribution is made; and
  • the individual must not have previously made a downsizer contribution in relation to another dwelling.

Downsizer contribution amount

The total amount that can be contributed as a downsizer contribution is the lesser of $300,000 and the amount of the individual’s share of the proceeds of sale.

Contributions can be made to multiple superannuation accounts held by an individual.

Compliance with caps

As a downsizer contribution is not a concessional nor non-concessional contribution it is not counted towards either contribution cap.  The total superannuation balance of an individual does not affect their eligibility to make a downsizer contribution (even if either the yearly contribution caps or the total superannuation balance of $1.6M have been reached). 

Ten year ownership test

The ten year period is generally calculated from the date of settlement of the initial purchase to the date of settlement of the sale.  The ownership interest does not have to be held purely by the individual making the downsizer contribution, it can be a combination of the individual, their spouse or former spouse over the ten year period.  This allows for changes of ownership between spouses in circumstances such as death or relationship breakdown.

Where a former spouse has died, the period the home was owned by the trustee of the deceased estate, may be able to be counted by the surviving spouse if they subsequently gain the ownership interest of the dwelling.

Non-arms length transactions

In the ATO Publications the ATO has made clear that the policy objective of the Downsizer Provisions is for individuals to source the downsizer contribution from the total proceeds received for the sale of the ownership interest in the dwelling.  It is not intended that individuals will be eligible to make downsizer contributions where they have entered into a non-arm’s length transaction to dispose of their ownership interest in the dwelling for less than market value and then applied CGT market value substitution rules to be taken to have received the market value of the ownership interest. 

The ATO will consider whether a scheme to reduce income tax under Part IVA of the Income Tax Assessment Act 1936 (Cth) applies where an individual disposes of their ownership interest in a dwelling to a related party on a non-arms length transaction for less than market value and downsizer contributions are made by the individual (or their spouse) to a value exceeding the sale price on the contract.

Is the trustee of your SMSF required to remove excess contributions from super?

It is up to the trustee of the superannuation fund to determine whether a downsizer contribution can be made and whether it complies with the trust deed.  Individuals with SMSFs should ensure that their trust deed permits members to make contributions in excess of their contributions caps (e.g. downsizer contributions) and that the trustee is not required to take action to remove these funds from the SMSF if the caps are exceeded.  The Cleardocs SMSF Trust Deed is drafted in a way that allows members to make contributions in excess of the cap and does not require the trustee to remove those contributions from superannuation.

More information from Maddocks

For more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of the Commercial team.

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Julia Tonkin
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Qualifications: BA, LLB, University of Melbourne

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