Downsizing the family home may be a consideration for many older Australians as their children grow older and leave the nest, and the home suddenly becomes too large for their needs. Alternatively, downsizing to a more manageable home or moving to alternative accommodation may also be required due to health and other lifestyle factors.
If the family home is sold, what opportunities exist for investing all or surplus proceeds of sale? One option is to contribute the proceeds of sale to superannuation. Since 1 July 2018, the Government has allowed Australians to make a contribution of up to $300,000 from the proceeds of sale of their home provided the eligibility requirements are met.
In this article, we examine the eligibility requirements and other compliance and estate planning considerations relevant to downsizer contributions.
To make a downsizer contribution:
- you must be aged 60 years or over (note that if the contribution is made prior to 1 July 2022, the age requirement is 65 years);
- the property being sold must:
- be located in Australia;
- be a main residence (but not a caravan, houseboat or other mobile home); and
- qualify for the CGT main residence exemption.
- the home must have been held for the 10 years leading up to the sale. However, provided the property meets the CGT main residence exemption requirements, there is no requirement to have lived in the property for all of the last 10 years;
- the contribution must be made within 90 days of settlement. There are limited circumstances in which the ATO may grant an extension; and
- the contribution limit is up to $300,000 and is a once-off contribution.
- You do not necessarily have to make a subsequent home purchase as a precondition to making the contribution.
- Downsizer contributions count towards your transfer balance cap (currently $1.7m) when benefits are moved to pension phase, but you can make a downsizer contribution even if you are over your total superannuation balance (also currently $1.7m).
- You can make a downsizer contribution even though you are not the legal owner of the home. For example, if you own the home, you can make a contribution of $300,000 and your spouse (who is not on the title) can also make a contribution up to the same amount, provided all of the eligibility requirements are complied with. The total amount of the contribution, however, cannot exceed the sale price.
- Before you make a downsizer contribution, you also need to consider any government benefits you are receiving and whether you remain eligible for those benefits after applying the assets and income tests. Expert advice should be sought.
Estate planning considerations
Unlike investing the proceeds or residual proceeds of the sale of your home in your personal name which will be dealt with via your Will on death, superannuation entitlements, which may include a downsizer contribution and the earnings on it, are not necessarily distributed as part of an estate.
Superannuation death benefits can generally be paid to:
- a spouse;
- a child of any age;
- a financial dependent;
- a person who was in an interdependent relationship with the deceased; and/or
- the estate.
The trustee of the fund will determine the payment of the death benefits, at their discretion unless the member has made a binding death benefit nomination or other binding direction, directing who they want their benefits paid to.
It is recommended that you review your estate planning where significant contributions, including a downsizer contribution, are made to superannuation as the following may be relevant considerations for which specialised advice should be sought:
- Is there a need to ensure superannuation death benefits do not form part of your estate because there is a risk of challenge to the estate? This may require:
- the preparation of a binding death benefit nomination; or
- in the context of a Self Managed Super Fund (SMSF), the appointment of independent or trusted executors who will have control of the fund following your death.
- Can the superannuation death benefits be paid as a pension to an intended beneficiary, noting that this may impact on the recipient’s transfer balance cap.
- What are the taxation implications of paying a death benefit to a particular dependant or dependents, or in to the estate?
- Are special trusts required to be included in a Will for an estate which will receive superannuation death benefits, eg, for vulnerable beneficiaries or beneficiaries where access to capital is to be restricted?
Other Compliance Issues
In addition to satisfying the eligibility requirements for a downsizer contribution, it is also important that:
- for SMSFs, prior to making the contribution, the governing deed of the fund is reviewed to ensure that the rules permit this type of contribution. As downsizer contributions are a fairly new method of contribution, older deeds may limit the types of contributions which can be made or impose other restrictions. The deed should be updated if the rules are limited;
- there is appropriate documentation in place to evidence the contribution being made. In a SMSF context, it is prudent for the trustee to acknowledge the receipt of the contribution, including the member who made the contribution, the type of contribution and the relevant provision under the deed for making a downsizer contribution, and the amount. The record of the resolution should be retained with the fund’s records; and
- prior to, or at the same time as making the contribution, you must provide the fund with a “Downsizer Contributions into Super” form. This form applies for both SMSFs and externally managed funds and can be found on the ATO website.
How we can help?
Financial planning advice is required to ensure that making a downsizer contribution to your superannuation fund meets your future financial and retirement goals and you should seek the advice of your financial adviser prior to making the contribution
Moores can assist by:
- reviewing your trust deed to determine whether downsizer contributions are permitted under the terms of the deed, and updating the deed if necessary;
- for contributions made to SMSFs, preparing trustee resolutions to note and accept the contribution on instructions; and
- reviewing your estate planning in light of the contribution and your overall superannuation entitlements, and advising of death benefit strategies to achieve your objectives, including the preparation of binding death benefit nominations if appropriate.
Please contact us for more detailed and tailored help.
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