Downsizer super contributions from part disposal of home

The ATO has advised that a part disposal of a person’s home can still be eligible for making a superannuation downsizer contribution.

DomaCom Limited has reported that it has received confirmation from the ATO that a part disposal of a person’s home can be eligible for making a superannuation downsizer contribution.

Previously, it was generally considered that a person aged 65 or over had to sell or dispose of their entire interest in their home (held for 10 years or more) to be eligible to make a downsizer contribution under s 292-102 of the ITAA 1997.

In an ASX media release, DomaCom said it has received ATO administrative binding advice (ABA) confirming that a person aged 65 or over can sell a part interest in their home and make a super downsizer contribution up to $300,000 per person.

While a residential property cannot be sold by an individual to their SMSF, DomaCom says the ATO advice means that a part interest in a home could potentially be sold to a home equity release provider. The capital proceeds received from such a disposal could then be contributed to a superannuation fund (including an SMSF) as a downsizer contribution, subject to the other conditions in s 292-102 of the ITAA 1997. A downsizer contribution cannot exceed the amount of the proceeds received from the disposal (capped at $300,000 per person). Of course, appropriate professional advice should be obtained.

DomaCom Limited (ASX: DCL) operates a managed investment scheme that enables fractional investments in property. It was the entity at the centre of the Aussiegolfa case.

Other considerations

Rather than relying on the ABA received by DomaCom, a taxpayer should consider applying to the ATO for an ABA for their own individual circumstances. Unlike a private binding ruling, an ABA is not legally binding on the ATO. However, if a taxpayer relies on an ABA which is later found to be incorrect, they will ordinarily not have to pay the tax that would otherwise be payable under the law.

The downsizer contribution provisions apply to capital proceeds received from the disposal of an “ownership interest” in a dwelling in Australia that qualifies for the main residence exemption (partial or full) for CGT purposes: s 292-102 of the ITAA 1997. The reference to a partial CGT exemption means that a downsizer contribution is generally available unless the dwelling is an investment property that the person has never lived in as their main residence.

The ownership interest can be a legal or equitable interest, an interest as a joint tenant or tenant in common or an interest in which a third party also has an interest: Law Companion Ruling LCR 2018/9. In addition, LCR 2018/9 states that an individual is not prevented from making a downsizer contribution if third parties hold interests in the dwelling.

Downsizer contributions do not count towards an individual’s non-concessional contributions cap. Such contributions are also exempt from the contribution rules for people aged 67 and older, and the restrictions on non-concessional contributions for people with total superannuation balances above $1.6m. A downsizer contribution is non-deductible and must be made within 90 days after the change in ownership of the home.

A downsizer contribution of a partial interest in a home would generally be more relevant for individuals who are ineligible to make further contributions to superannuation (where that is an appropriate strategy for them). For example, those aged 67 and over, and those who have exceeded the total superannuation balance threshold of $1.6m and are prevented from making further non-concessional contributions.

Government Pension Loans Scheme

Self-funded retirees who are asset-rich, but income-poor, could also consider the Government’s Pension Loans Scheme (PLS). While the PLS is a type of reverse mortgage, the main difference is that the Government scheme involves a loan made via ongoing fortnightly payments (non-taxable) and doesn’t allow for a lump sum payment (unlike a reverse mortgage from a commercial provider).

As the proceeds from a PLS loan are received as fortnightly payments, it would severely restrict the amount of any downsizer contribution which is limited to the capital proceeds received from the disposal of the interest in a home. However, the PLS has other advantages in the form of potentially lower set up costs and an interest rate of 4.5%. As with a reverse mortgage, the suitability of a loan via the PLS will depend on each individual’s circumstances and needs.

Stuart Jones is a Senior Tax Writer with Thomson Reuters and a respected commentator on all matters superannuation. Stuart is the author of the Australian Superannuation Handbook and contributes extensively to other Thomson Reuters’ services, including the Australian Tax Handbook.

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