New tool for the tool bag

Retirees have just been given a new tool for their strategy tool bag. The downsizer superannuation contribution (DSC) legislation was just passed just before Christmas.

The DSC is exactly as the name suggests, the ability for retirees to contribute proceeds to superannuation from selling their home and buying a smaller/cheaper [1] one (Downsizing) The new rules allow a fourth way to contribute to superannuation( the other three are concessional, non-concessional and Small business capital gains) will come into a affect from 1st of July 2018.   The good news is the eligibility for making a DSC is not means tested, nor aged tested.  So as long as you are over 65 and have owned your home for more than 10 years you are able to make a contribution of $300,000 each or $600,000 in total. The one-off contribution will not be affected by a person’s transfer balance cap, so if you have more than $1.6 million you still be eligible for the contribution.

It opens up lot of news strategies as previously anyone post 75 was severely disadvantaged as they couldn’t contribute to the most tax effectively entity structure in Australia.

Let’s work through a practical example;

An Example

George and Ruth are both aged 78 and decide to sell their $1.2million home for a townhouse next to the daughters place, worth $600,000.  They each already have a pension balance of $1.6m.  Meeting the eligibility (see below re the exact eligibility that needs to be met) allows them to make a downsizer contribution of $300,000 each, a total of $600,000.  It is now irrelevant that George and Ruth don’t satisfy the age and work test for superannuation contributions (these tests don’t apply to DSC’s) It is also irrelevant that they have a superannuation balances in excess if $1.6m (normally superannuation rules stop any contributions to super if you are over $1.6million) even though they are 3 year older than the previous aged cap (75).  So George and Ruth are able to sell their home, buy a town house next to their daughter and contribute the remainder (up to $600,000) to superannuation.

The Fine Print

There is some finer print to the legislation, but essentially it is governed by the following seven conditions:

  1. They must be 65 or older at the time the contribution is made.
  2. The contribution must be in respect of the proceeds of the sale of a qualifying dwelling in Australia.
  3. A 10-year ownership condition must be met.
  4. Any gain or loss on the disposal of the dwelling must have qualified (or would have qualified) for the main residence CGT exemption in whole or part;
  5. The contribution must be made within 90 days of the disposal of the dwelling, or such longer time as the commissioner allows.
  6. The person must choose to treat the contribution as a downsizer contribution, and notify their superannuation provider, in the approved form, of this choice at the time the contribution is made.
  7. The person cannot have had DSCs in relation to an earlier disposal of a main residence.

For a property to be classed as a qualified dwelling in Australia, it must have been a fixed structure. Proceeds from the sale of houseboats, caravans, and other forms of mobile homes, even if they were a main residence, do not qualify for a DSC.

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.

A very powerful tool that can be used for Good or Evil 

A word of caution:  even though this is a wonderful change in superannuation legislation, it is very powerful tool, especially when you consider your eligibility to the Aged Pension. The problem is simple one, your home value, what-ever it is, is exempt from assessment for the Aged Pension, however superannuation is not.  So the amount that you contribute to superannuation will be assessed in the assets test and income test, and could change your eligibility substantially.

So as per usual seek some great advice before pulling this one out of your strategy tool bag.

[1] Note, the legislation doesn’t actually say you have to buy a new home, so the name is a little miss leading.