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    Categories: RetirementSuperannuation & SMSF

Downsizing into Retirement

The downsizer contribution initiative is due to come into effect on the 1 July 2018. Late last year the Government passed its policy which allows super fund members over the age of 65 to sell a main residence and contribute funds into their superannuation accounts without contribution cap and work test issues.

While it may seem quite straight forward, like any government policies, there are a few hoops to jump first. There are three key steps that need to be taken if a member would like to be eligible to make downsizer contributions.

 

#1: Eligibility

The first step a member needs to take is to confirm that their contributions will be eligible to be contributed to their fund. An eligible downsizer contribution is where:
1. the contribution is made to a complying super fund by a member aged 65 years or older;

2. the 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;

3. the member or the member’s spouse had an interest in the main residence before the disposal;

4. the interest in the main residence was held by:
– the member;
– the member’s spouse;
– the member’s former spouse;
– a trustee of the estate of the member’s deceased spouse; and
– must have been held during the 10 years prior to the disposal;

5. The member has not previously made downsizer contributions in relation to an earlier disposal of a main residence.
Just to be clear, a caravan, houseboat or other mobile home does not qualify as a main residence for these purposes.

A member needs to consider the above before moving to the next criteria.

 

#2: Contributions

Upon the sale of a main residence a member can make up to a maximum of $300,000 in contributions to their super fund. A great aspect to this initiative is there is no age limit or gainful employment test that needs to be satisfied. The contributions are also not counted towards the relevant member’s contribution caps or total superannuation balance in the financial year a downsizer contribution is made. For those members that still meet the work test and are planning on contributing non-concessional contributions in the future, please be mindful of the total super balance and how the downsizer contribution may affect your ability to contribute in future years.

Another key consideration is the timing of the sale. Once the member sells their main residence, they are required to make downsizer contributions to their super fund within 90 days after the day the ownership changed (typically 90 days from settlement). Make sure that the settlement timeframes are within that 90 period otherwise you may need to request an extension from the ATO.

While multiple downsizer contributions in respect of the sale of the same residence can be made, the total amount of downsizer contributions made by each member cannot exceed $300,000. It is important to note that the $300,000 downsizer contribution cap is for only one member, therefore this would potentially allow for additional contributions of $600,000 for a couple (ie, 2 x $300,000).

 

#3: Verification

As part of the superfund annual reporting requirements, each superfund in receipt of downsizer contributions will need to supply the ATO, using the prescribed form, the details of the contribution. The ATO will then run verification checks on the amount and may contact members for further information.

If the ATO has verified that the member has made eligible downsizer contributions, no further action is taken. However, if the contribution does not qualify as a downsizer contribution the ATO will notify the trustee of the fund. The amount will then either be allocated as a non-concessional contribution — if permitted by superannuation law and may result in the member exceeding their cap — or refunded to the member.

 

Tips and traps for SMSF’s

The Deed
As the downsizer contribution is a new type of contribution, the SMSF’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 in excess of 75 years. Additionally the SMSF deed should provide appropriate mechanisms in resolving what happens when a downsizer contribution is deemed ineligible by the ATO. If you are wanting to make these contributions please have a read of your Deed or get in touch with us and we can guide you in the right direction.

Age Pension
Any members in receipt of Centrelink entitlements should note that disposing of their main residence and contributing downsizer contributions to their super fund may adversely impact on their payments from the Government. Broadly, the age pension provided by Centrelink is assessed against, among other things, an assets test. A person’s family home is generally not included in the assets test, however superannuation savings are included once a member reaches pension age. This means that if a member disposes of their main residence and makes a downsizer contribution, the member may either receive reduced pension payments or no longer be eligible for any payments at all.

Getting Advice
We believe financial advice is a great thing and with all things Super related, it can be hard to navigate through your options and find the best way forward. Having a strategic adviser that can show you your options with the downsizer contributions as well as all retirement planning scenarios can be invaluable. If you would like further information about this initiative or to have a chat about your retirement plan, please get in touch!

 

The Quill Team :We are a team of Business Accounting, Financial Planning and Superannuation enthusiasts. Quill is your one stop shop for all your financial needs. Think of us as your financial fitness centre. We offer accounting, financial planning, insurance and superannuation support and advice to our clients.