Tax law contains penalty taxes if you put more than a set limit into your superannuation. And one of those exceptions to the excess non-concessional contributions tax triggering is if you make a downsizer super contribution.
Using the DownSizer Super Contribution tax exemption effectively and strategically will allow somebody to increase their SMSF balance. With the ultimate goal of increasing the amount of tax free income the family is generating.
Tax law contains the Downsizer contribution at s292-102 of the 1997 Tax Act. And while it is only one section of the 1997 Tax Act – it goes for over 1200 words. So, getting a clear understanding of the tax law and how the Tax Act manages the DownSizer Super Contribution is critical in planning your family and succession plan.
Another way to increase your SMSF quickly is also through the Small Business CGT Concessions which is also contained in the tax law.
Of course, SMSF’s have their own benefit and downsides. With the downsizer super contribution applying to both superannuation funds generally and SMSF’s.
Who can qualify for the Downsizer contribution?
To enjoy the downsizer contribution you need to have sold a home, enjoyed the tax free sale of the home by virtue of Subdivision 118 of the 1997 Act and also have held the home for 10 years.
If you held the home prior to the introduction of capital gains tax, and the only reason why the home is not tax free under Subdivision 118 is that capital gains tax does not apply, then you also qualify.
And if the home is only partially exempt through the operation of Subdivision 118 you can also qualify for the downsizer contribution to the extent of that partial exemption.
So to properly understand and manage the downsizer super contributions you should always have clear tax advice (or legal advice) discussing your entry path into the downsizer contribution.
You also need to be over 60 when you make the contribution. And from 1 July 2023 the age is being reduced to 55.
The contributions do not count to your Total Superannuation Balance
If your total superannuation balance exceeds $1.7m you cannot contribution any more to your fund. If you exceed the maximum threshold the ATO will allow you to either withdraw that amount of money or alternatively pay excess non-concessional contributions tax in the fund (which is very high).
However if you make a DownSizer Super Contribution you can contribute that amount and not be subject to the excess non-concessional contributions tax on that contribution.
For example
Michael, 62, from Subiaco has a SMSF with a balance of $2.6m.
Michael can contribute $300k from the sale of his home to his SMSF as a downsizer contribution. He will not incur additional taxes or be required to withdraw this from his SMSF.
The downsizer super contribution will not increase your transfer balance cap however.
You don’t need to buy a new home
There is nothing in the tax law requiring you to purchase a new home to enjoy the concessions. So while tax law refers to the exemption as a “Downsizer” it could also be referred to as “Homeless”.
You only need to have held the home for 10 years (and enjoy the main residence exemption).
This opens opportunities with tax structuring. The sale proceeds of the family home could be injected into the SMSF (or super fund) so the income is taxed more effectively. And the investment assets outside of the SMSF, which is taxed more heavily, could then be used to purchase the new family home (if one is being bought).
There is no age limit or work test
Unlike other areas of tax law, you don’t have to satisfy an age limit or work test to enjoy the tax concession.
Normally for people over 75 the superannuation rules make it difficulty to contribute money to superannuation. And the downsizer rules are one of the ways people over 75 can still contribute to their SMSF.
This can work well for a family moving into aged care for example.
You only get it once
You only have the ability to enjoy the downsizer super contribution once.
Related party transfers do not work
If you sell a home for nothing to a related party tax rules can apply so that the sale proceeds are changed to their market value. However for the downsizer super contribution rules these market value substitution rules will not work.
So transferring the family home to a child for nothing, and then attempting to increase your SMSF balance will not be an effective tax strategy.
The contribution works well for estate planning
As tax consultants we are often giving tax advice about the hidden death benefits tax within superannuation funds. However a downsizer super contribution, on death, does not attract tax to either the estate or the superannuation beneficiaries.
There are strict time limits
You must contribute your super contribution (upto $300k) within 90 days of receiving the cash proceeds from the sale. And you must also notify the ATO of the contribution with the correct form.
You don’t need to own the home
If your spouse owned the family home you can make a contribution from that capital gain. Of course a family can only enjoy one main residence exemption tax free so effectively the decision to own the family home in your spouses name (say for asset protection reasons) will not hamper your ability to access the tax exemption from the downsizer super contribution.
Don’t forget the age pension
Services Australia (Centrelink) currently exempts the family home from the assets test when considering your entitlement to the age pension. And if you sell the family home, contribute money to your super fund, you assets tested for age pension testing will now increase. So you might find that your age pension will reduce.
So, getting good advice about the strategy is sound.
Investment advice is needed
While the DownSizer Super Contribution is clearly managed by the ATO and is governed in tax law – getting investment advice is good. It is pointless to get great tax advice from your Perth tax consultant, structure your family affairs tax effectively, and then proceed to lose your money invested because or poor (or no) investment advice. So, talking to a personal financial product advisor about an investment strategy is always a sound idea.
At Westcourt we have deep tax knowledge for families who own business. Our expertise in succession and superannuation strategy as tax consultants across Perth and Australia as a single focus firm is unique. And given our global strength in helping families with international assets and the tax regimes internationally allows families we are a natural choice for founder-led business families looking to succession – so why not give us a call?
