30 June 2018
Baby-boomers, take note: tomorrow marks the start of the downsizing rules that may help you sidestep the ever-shrinking superannuation contribution caps.
But in what will come as a surprise to many, investment property may be eligible for the $300,000 downsizing super contribution under certain circumstances. But beware: if you do not follow all the rules you may end up with a hefty penalty from the Australian Taxation Office.
Announced in last year’s federal budget, the downsizing measure was aimed at those over 65 and retired who otherwise could not contribute to superannuation because of the work test requirement. The federal government also wanted to encourage older Australians to sell the family home, which might be too large given the children had left home, and to free up stock for younger families who were starting out.
Under the downsizing measures, the key requirements are:
- You must be at least 65 at the date of contribution.
- The property contract of sale exchanges after July 1 next year.
- The property was owned for 10 years before sale.
- The proceeds must be at least partially exempt from capital gains tax under the main residence exemption.
- The contribution must be made within 90 days of settlement.
- It is a one-off. You cannot use this on multiple homes.
In a departure from the government’s rhetoric on transitioning the elderly from their family homes to the actual wording in the legislated bill, the downsizing rules do not exclusively apply to people’s primary residence.
Under certain circumstances, investment property can be sold and up to $300,000 per spouse can be contributed into super from the proceeds.
On review of the Treasury Law Amendment Bill 2017, in the wording of the 10- year minimum ownership section, there is no stated requirement to have physically lived in the property continuously for a full 10-year period. Rather, it refers to having “held” an interest in the property over the 10 years.
There is, however a requirement that the property was lived in as a main residence for at least some of the 10-year period. The ATO summarises the relevant section of the Treasury Law Amendment Bill 2017 on its website: “The proceeds (capital gain or loss) from the sale of the home are either exempt or partially exempt from capital gains tax under the main residence exemption.”
In other words, as long as you lived in the property as your main residence at some stage (which triggers a partial exemption under the main residence exemption), that property is eligible for the downsizing provisions. In fact, you could have lived in the property for six months as your main residence, then rented it out for the next 9½ years, and still be eligible for the downsizing contribution on the proceeds of sale.
This is the case even if you subsequently purchased another property and moved into that as your main residence while still owning the first property, which you later claimed the downsizing provisions against. But you can’t do it on both properties: it’s a single-use rule.
Looking at some of the other requirements, it can be easy to inadvertently mess up in the process. Selling and buying property is usually the biggest financial decision most people make. Sydney buyer’s agent Shamren Odisho says: “After selling the family home of over 10 years, it may take a few months to find the new property to purchase, and in some instances people may go travelling or rent a property before re-entering the property market.”
In these situations, people may feel it’s best to hold off making the downsizing contribution until they know how much they’ll need to spend on the new property. But if they hold off for more than 90 days after settlement of their home, they’ll miss the window to contribute into super under the downsizing rules.
ATO has conveyed that it may apply “false and misleading’’ penalties, which run into the thousands, for contributions made under the downsizing provisions after 90 days.
But in practice it usually won’t be necessary to hold off putting money into super until after the new property is purchased.
From age 65, money in super is not preserved, meaning that even if the full $300,000 were contributed into super under the downsizing rules, it could be accessed, in full, at any point without restriction as a tax-free lump sum.
The prudent approach would be to keep the money contributed from the proceeds of the family home in a cash option within super until the new home was purchased, at which time it would be known if any of the $300,000 needed to be withdrawn to cover the cost of the new property, or whether the money was then free to be invested in super.
For many, the downsizing rules provided flexibility in what had become a stiff and rigid retirement savings system during the past 10 years. And whether it was intentional is yet to be seen, but it appears the scope of properties that fall within the downsizing rules is larger than first anticipated, including not only the family home but also investment property that have been lived in.
James Gerrard is the principal and director of Sydney financial planning firm