Law Companion Ruling

LCR 2018/9

Housing affordability measures: contributing the proceeds of downsizing to superannuation

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What this Ruling is about

1. The downsizing measure^[1] introduces a new contribution type, a 'downsizer contribution', into the superannuation system. This allows individuals to contribute the proceeds of the sale of their home into superannuation where certain requirements are satisfied.

2. This Ruling discusses these contributions and how the measure interacts with other income tax and superannuation concepts including:

•

contribution caps

•

fund acceptance rules, and

•

capital gains tax (CGT).

3. This Ruling does not provide guidance on whether a capital gain or loss arising from a disposal can be exempted under Subdivision 118-B of the Income Tax Assessment Act 1997 (ITAA 1997) which concerns 'main residence'. It also does not address the consequences of making a non-compliant contribution, including where the fund may retain these contributions under existing acceptance requirements for other contribution types.

4. All legislative references in this Ruling are to the ITAA 1997 unless otherwise indicated.

Downsizer contribution

5. Generally, a personal contribution that an individual makes on their own behalf is treated as a non-concessional contribution unless a deduction has been claimed for it, or it is subject to an exclusion from treatment as a non-concessional contribution.

6. Downsizer contributions are excluded from the definition of a non-concessional contribution^[2] and if an election is made to treat a contribution as a downsizer contribution, and it is reported as such, a deduction cannot be claimed for it.^[3]

7. A work test is not required to be satisfied by the individual in respect of whom a downsizer contribution is made.^[4]

8. For a contribution made to an individual's complying superannuation plan to be a downsizer contribution, the following conditions must be satisfied:

•

the individual must be aged 65 years or older at the time the contribution is made^[5]

•

the contribution must be an amount equal to all or part of the capital proceeds received from the disposal of an interest in a qualifying dwelling in Australia held by the individual or their spouse just before the disposal^[6]

•

the 10-year ownership condition^[7]

•

any capital gain or loss from the disposal of the dwelling must have qualified (or would have qualified) for the main residence CGT exemption in whole or part^[8]

•

the contribution must have been made within 90 days of disposing of the dwelling, or such longer time as allowed by the Commissioner^[9]

•

a choice is made to treat the contribution as a downsizer contribution, and the complying superannuation plan provider is notified in the approved form of this choice at or before the time the contribution is made^[10]

•

the individual has not previously made downsizer contributions, or had one made on their behalf, in relation to an earlier disposal^[11], and

•

the maximum amount of the contributions is the lesser of either $300,000, or the proceeds from the sale of the interests in the dwelling.^[12]

9. Individuals are not required to purchase another dwelling following the sale of the relevant dwelling interest to be eligible to make a downsizer contribution.

10. A contribution can only be a downsizer contribution where the contract for the disposal of the relevant dwelling interest is entered into on or after 1 July 2018.

Compliance with existing caps

11. A downsizer contribution is neither a concessional nor a non-concessional contribution^[13] and therefore is not counted towards the respective contribution caps.

12. The total superannuation balance of the individual will not affect their eligibility to make a downsizer contribution. Note, however, that any downsizer contribution amount will still be counted towards their total superannuation balance.

Disposal of an ownership interest in a dwelling

13. To make a downsizer contribution, an individual or their spouse^[14] must have 'disposed' of an 'ownership interest' in a 'dwelling'^[15] they held just before the disposal which is located in Australia.^[16]

14. In respect to this measure, the definition of the term 'dwelling'^[17] is modified to exclude caravans, houseboats and other mobile homes.^[18] The effect of this modification is that a 'dwelling' includes^[19]:

(a) a unit of accommodation that:

(i)

is a building or is contained in a building; and

(ii)

consists wholly or mainly of residential accommodation; and

...

(c) any land immediately under the unit of accommodation.

15. A disposal occurs when ownership of the interest changes from the individual to another entity by an act or event, or by operation of law.^[20] For the vast majority of eligible contributions, this will occur at the date of settlement of the sale of the property.^[21]

16. The meaning of 'ownership interest in a dwelling' includes legal and equitable interests^[22] and includes an interest as a joint tenant or an interest as a tenant in common. Other parties may hold interests in the dwelling but this does not prevent the individual or their spouse from making a contribution, or contributions, based on the interests which they dispose of.

17. If the interest disposed of was owned by only one spouse, the spouse who does not hold an ownership interest may also make a downsizer contribution, or have one made on their behalf, provided they meet all other requirements.^[23]

Example 1 - interest as a tenant in common

18. Philippa and Charles, both 70, own a dwelling as tenants in common with Charles' brother Lucas. Philippa and Charles are married and both own shares of 40% each in the property, and Lucas has the remaining 20% share.

19. Philippa and Charles have owned and lived in the dwelling for 20 years, and have treated the dwelling as their main residence for this time. In 2020 the dwelling is sold for $700,000. They are eligible for the main residence exemption on the sale of their interests.

20. Philippa and Charles are able to make downsizer contributions from the capital proceeds of the disposal of their combined interests. Their combined ownership share is 80% so, the capital proceeds, from which their downsizer contributions can be made, are $560,000.^[24]

Ten-year ownership test

21. To make an eligible contribution, the ownership interest in the dwelling that is disposed of, or an ownership interest in the land on which the dwelling is situated, must have been held at all times during the 10 years prior to the disposal.^[25]

22. This ownership period is calculated from the day the ownership interest in the dwelling commenced to the day it ceased. Generally, this will be from the date of settlement of the purchase to the date of settlement of the sale.

23. An individual is not required to have held an ownership interest for the whole of the 10-year period, provided that an ownership interest has been held by some combination of:

•

the individual

•

their spouse, or

•

their former spouse,

at all times during the 10 years preceding the disposal.^[26]

24. This allows for changes in ownership between spouses to account for circumstances such as death and relationship breakdown.

Ten-year ownership test - death of spouse

25. Where the spouse who holds an ownership interest dies, the surviving spouse may subsequently gain the ownership interest as a beneficiary of the deceased estate. In this situation, the surviving spouse is able to count the period of ownership of their deceased spouse (including the period the dwelling is held by the trustee of the deceased estate) towards the 10-year ownership test.^[27]

Contribution when interest held by trustee of deceased estate

26. Where a spouse dies, they are considered to continue to hold their ownership interest while the interest is held by the trustee of the deceased estate.^[28] If the trustee disposes of the interest, the surviving spouse is able to make a downsizer contribution, or have one made on their behalf, subject to the other requirements referred to in paragraph 8 of this Ruling being met, as the deceased spouse is treated as having held the interest just prior to the disposal.^[29]

Example 2 - trustee of deceased estate disposes of the interest

27. In 2019 Norma and Harold are both 74 years old.

28. They are married and have lived in their home for the past 25 years. The title for their home is solely in Norma's name.

29. Norma passes away in mid-2019. On 1 November 2019 the trustee of Norma's estate sells the house. Harold receives a payment from the trustee as a result of Norma's estate being wound up. Subject to the timing requirements concerning making the contribution, Harold is able to make a downsizer contribution equal to all or part of the proceeds received from the sale of the house, up to a maximum of $300,000.

30. Harold satisfies the 10-year ownership test for the purposes of the downsizer rules because at all times over the 10-year period preceding 1 November 2019, the ownership interest in the home was held by Norma. Subsection 292-102(5) operates to ensure that the interest is taken to be held by Norma when it is held by the trustee of her deceased estate.

Ten-year ownership test - interest in the land

31. As stated in paragraph 21 of this Ruling, the 10-year holding requirement can relate to the land on which the dwelling is situated which allows for cases where a property is knocked down and another is built in its place, or where a dwelling is built on a vacant block.^[30]

32. In these circumstances, an individual must have owned an interest in the land for at least 10 years prior to the disposal of the dwelling interest. All other requirements, including that the disposal must relate to a dwelling and that the main residence requirement is satisfied, continue to apply.

33. Where the land on which the dwelling is situated has been subdivided within the last 10 years, the 10-year ownership test may also still be satisfied.

34. An ownership interest in the land is deemed to have been held for the period from its commencement, generally settlement for the contract to purchase, until the settlement for the contract for sale.

35. Subdividing land does not necessarily give rise to a CGT event, it merely splits the interest into separate assets in their own right.^[31] An ownership interest in the land on which the dwelling is situated is treated as being held from the time that the ownership interest in the original parcel was first held.^[32]

36. Where a subdivision has occurred, it is important to note that the ownership interest in a dwelling requirement and the main residence exemption requirement must be satisfied for the contribution to be eligible to be treated as a downsizer contribution. These requirements will not be satisfied where you dispose a subdivided interest in land on which the dwelling is not situated unless:

•

the interest is adjacent land for the purposes of section 118-120, and

•

you dispose of the interest to the same person and at the same time as you dispose of the interest on which the dwelling is situated.^[33]

Example 3 - vacant block purchased

37. Akira purchased a vacant block of land in 2010 when she was aged 58. In 2017 she built a dwelling on the property and resided in that property for four years, treating that property as her main residence for CGT purposes.

38. In 2021 Akira sold the dwelling and is able to partially disregard the resulting capital gain made upon this disposal. Akira is able to make a downsizer contribution as she satisfies the 10-year ownership test even though at the time she purchased the property it did not have a dwelling on it.

Example 4 - subdivided property

39. Chris owns a house on a large block that has been his main residence for 10 years. He later subdivides this property into two lots. He then sells the lot on which his dwelling is situated.

40. Chris is able to make a downsizer contribution, provided he meets the other requirements referred to in paragraph 8 of this Ruling, as he has held an interest in the land on which the dwelling is situated for 10 years and is able to disregard some of the resulting capital gain under the main residence exemption.

41. Had Chris sold both of the new lots together, he would be able to make a downsizer contribution in respect of the capital proceeds from the lot on which the dwelling is situated. Where the vacant lot amounts to adjacent land in accordance with section 118-120, and as such is disposed of in the same CGT event as the dwelling, then the total proceeds received can be considered for the purposes of calculating the individual's maximum contribution amount.

Ten-year ownership test - substitute property interests

42. In certain circumstances, the 10-year ownership rule can be met if the dwelling disposed of is a substitute dwelling that has not been owned for 10 years or more.^[34]

43. This would occur where a dwelling that was an individual's main residence, or was treated as such, had been compulsorily acquired, lost or destroyed.^[35] Where this is the case, and they acquired a substitute property interest in accordance with subsection 118-147(1), the 10-year ownership test can be met if the ownership interest in the initial dwelling was held at least 10 years before the disposal of the substitute dwelling.

Main residence requirement

44. To make a downsizer contribution the dwelling must have been the individual's main residence, at some point during the period of ownership, for the purposes of the main residence exemption.^[36] Specifically, the capital gain or loss relating to the disposal of the old interest must be wholly or partially disregarded because the property has been treated as their main residence.^[37] In this context, this requirement will be satisfied where the capital gain or loss made by an individual is effectively exempted under the main residence provisions.^[38]

45. This test must apply to the individual for whom the contribution is made, or would otherwise apply if the old interest was held by them, and not their spouse, prior to disposal.^[39]

46. If the interest was acquired prior to 20 September 1985, an individual is able to make a downsizer contribution only if they would have been able to claim this main residence exemption had the dwelling been acquired after this date.^[40] This is to ensure that a dwelling that is not effectively exempted, in whole or part, under the main residence provisions due to the asset being acquired prior to 20 September 1985, is treated the same in terms of downsizer eligibility as a dwelling acquired on or after this date.

47. A partial main residence exemption for the purposes of downsizer contribution eligibility may apply in a variety of situations, including where the dwelling:

•

was not the main residence for the entire period of ownership

•

was used to produce assessable income (in whole or part) for a period of time during ownership, or

•

is on land greater than two hectares.

48. The property does not need to be treated as the individuals' main residence at the time of disposal, as long as a partial main residence exemption under the main residence provisions applied, or would have applied if the interest was held by them and not their spouse.

49. If an interest in the dwelling is held in a trust or company structure, the capital gain made by the trustee or company, resulting from the disposal will not qualify for a main residence exemption.

50. For the purposes of making a downsizer contribution, it is not relevant how the main residence exemption is calculated or apportioned. The downsizer contribution amount available relates to the proceeds from the disposal of the interest in a dwelling, and does not depend on the extent to which the amount is exempt as a main residence for CGT.^[41]

51. The main residence condition is not related to the 10-year ownership condition. That is, the dwelling does not have to have been the individual's main residence within the preceding 10-year period immediately prior to disposal.

Example 5 - dwelling interest on land over two hectares

52. James purchases a house on four hectares in 2006 for $300,000. He lives in the house with his spouse, Joyce. For the entire period of ownership it is their main residence and has not been used to produce assessable income. They have not previously made a downsizer contribution.

53. In 2019 James sells the property for $750,000. They are both 66 years old. Under existing CGT rules relating to main residences, James is entitled to disregard the capital gain on the main residence and its adjacent land, up to two hectares, which is not used to produce income. As the land of the dwelling interest is greater than two hectares, the main residence exemption does not apply to the entire capital gain from the disposal and only a partial exemption to CGT is available.

54. James and Joyce wish to make a downsizer contribution from the sale proceeds.

55. They do not need to apportion the proceeds of the sale to make their downsizer contribution. They can consider the total proceeds from the disposal to determine the amount available for the contribution.

56. As Joyce would have been able to partially disregard the capital gain on the basis of main residency had she held the ownership interest herself, she is able to make a downsizer contribution as James' spouse. James and Joyce are each eligible to make a contribution of up to $300,000 to their complying superannuation plan.

Example 6 - main residence partial exemption by time

57. Brian purchased a property in 2003 (the first house) which he rented out from the time of purchase for five years. During this time the property was not his main residence for the purposes of CGT.

58. In 2008 Brian purchased another residential rental property and started residing in the first house, purchased in 2003. He chose to treat the first house as his main residence.

59. In 2019, at age 65, Brian decided to sell the first house. Under the existing CGT rules^[42], Brian is able to partially disregard the capital gain by the proportion of ownership time that the first house was his main residence.

60. He can make a downsizer contribution relating to the total proceeds received from the sale up to a maximum of $300,000.

Contribution amounts

61. Downsizer contributions are limited to an amount not exceeding the lesser of $300,000, or the total capital proceeds that the individual, their spouse, or they both, receive from disposing of their ownership interests in the dwelling.^[43] Downsizer contributions may be able to be made as an in-specie contribution, for example, if the capital proceeds have been used to purchase an asset and that asset is contributed.

62. Capital proceeds are defined in the ITAA 1997, and for most cases are the money received, or entitled to be received, from the sale of the interest in the dwelling.^[44] The policy intent for the downsizer measure is that an individual source their downsizer contribution from the total proceeds received from the disposal of the ownership interest in the dwelling.^[45] It is not intended that an individual be eligible to make a downsizer contribution by entering into a non-arm's length arrangement to dispose of their ownership interest in the dwelling for less than market value and applying the CGT market value substitution rules^[46] so as to be taken to have received the market value of the ownership interest.

63. On that basis, where an individual disposes of their ownership interest in a dwelling to a related party on a non-arm's length basis for less than market value, and the individual or their spouse make downsizer contributions the total value of which exceeds the amount of the sale price specified in the contract, the Commissioner will consider whether Part IVA of the Income Tax Assessment Act 1936 (Part IVA) applies to the arrangement. Part IVA applies to a scheme if a tax benefit has been obtained in connection with the scheme and the main purpose of a person who participated in the scheme, or a part of it, was to enable a taxpayer to obtain that tax benefit.

64. Where an individual uses the capital proceeds to discharge a mortgage, the individual is still able to make a downsizer contribution up to the lesser of $300,000 or the total capital proceeds.

65. More than one downsizer contribution may be made to one or more superannuation plans from the sale of interests in a dwelling, provided that an individual's total contributions do not breach their maximum contribution amount. However, this does not extend to contributions from the proceeds of other properties, or of ownership interests in the same dwelling that are disposed of at a later time (for example, because of the sale of part of the ownership interests in a dwelling, or where there has been a sale and re-acquisition of the same dwelling).

66. Spouses may make downsizer contributions from the proceeds of their own and their spouse's interests in a dwelling. To do so, both ownership interests must relate to the same dwelling, and have been disposed of under the same contract. The total downsizer contributions cannot exceed the lesser of the combined capital proceeds from the sale of these interests or $300,000 for each individual.

67. Where individuals use their spouse's interest in the property to calculate their own available maximum contribution amount, it is not a requirement that their spouse is eligible to make a downsizer contribution.

Example 7 - available contribution amounts divided between spouses (less than $600,000)

68. Stuart and Shirley are married and own a house as tenants in common, each with a 50% share in the property. They are both eligible to make a downsizer contribution from the capital proceeds from the sale of this house.

69. In 2019 they sell the property for $500,000. The capital proceeds attributable to each individual's interest are $250,000.

70. As an individual is able to contribute the capital proceeds derived from the disposal of both their interest and their spouses' interest, as long as they are sold under the same contract, Stuart and Shirley are able to access each other's proceeds to make a downsizer contribution.

71. Stuart and Shirley can choose how to allocate the total available contribution amount, as long as neither individual contributes more than $300,000 in total, and the sum of their respective contributions does not exceed the capital proceeds of $500,000.

72. They choose to make $300,000 of contributions to Shirley's complying superannuation plan, and a $200,000 contribution to Stuart's complying superannuation plan.

Example 8 - using an ineligible spouse's interest to calculate maximum contribution amount

73. Elizabeth and Philip are spouses, and have lived together in a house that they purchased in 1990. They own the house as joint tenants. In 2020 they decide to sell this house. At the time of disposal, Elizabeth is 67 and Philip is 62 years old.

74. The total capital proceeds from the sale are $500,000, and, accordingly as joint tenants, each ownership interest has capital proceeds of $250,000.

75. Assuming that Elizabeth has not made a downsizer contribution previously, she is eligible to make a downsizer contribution. Philip, being under 65 at the time of the proposed contribution, does not meet the eligibility requirements to make a downsizer contribution.

76. Both of the spouse's ownership interests are in the same dwelling and disposed of under the same contract.

77. This means that in calculating her total available maximum downsizer contribution amount, Elizabeth is able to include the capital proceeds from her interest, as well as the interest of Philip. This amounts to $500,000. As this amount is greater than the total maximum contribution amount of $300,000, Elizabeth is able to make downsizer contributions up to $300,000.

Treating a contribution as a downsizer contribution

78. As with all types of contributions, a superannuation provider does not have to accept a contribution if it does not meet their trust deed rules.

79. The individual for whom the contribution is made must make a choice to treat a contribution as a downsizer contribution.^[47] This choice must be provided in the approved form to the complying superannuation plan provider.^[48] This gives the provider evidence of the individual's intentions and eligibility. The approved form must be submitted before, or at the time, the contribution is made.

80. The correct form must be submitted each time a downsizer contribution is made to a provider.

Contribution made within 90 days after disposal of interest

81. A downsizer contribution must be made within 90 days (or such longer time as the Commissioner allows), after the change of ownership of the old interest.^[49] This is the time of settlement of the contract of sale in most cases. This date may be different to the relevant date for the CGT event, which is the date the contract is entered into.^[50]

82. The Commissioner may grant an extension of time to make a contribution in some circumstances. An extension of time can be requested by the individual at any time, however it must be granted before the individual makes a contribution to their fund outside of the 90 day period.

Commissioner of Taxation
7 November 2018

© AUSTRALIAN TAXATION OFFICE FOR THE COMMONWEALTH OF AUSTRALIA

You are free to copy, adapt, modify, transmit and distribute this material as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).

Previously released in draft format as LCR 2018/D4

References

Business Line:  SPR

Related Rulings/Determinations:

TD 97/3
TD 1999/68

Legislative References:
ITAA 1997
ITAA 1997 104-10
ITAA 1997 104-10(3)
ITAA 1997 112-25
ITAA 1997 116-20(1)
ITAA 1997 116-30(1)
ITAA 1997 116-30(2)
ITAA 1997 Subdiv 118-B
ITAA 1997 118-115
ITAA 1997 118-115(1)
ITAA 1997 118-120
ITAA 1997 118-130
ITAA 1997 118-130(2)
ITAA 1997 118-147(1)
ITAA 1997 118-185
ITAA 1997 118-192
ITAA 1997 124-70(1)
ITAA 1997 290-167
ITAA 1997 292-90(2)(c)(iiia)
ITAA 1997 292-102(1)(a)
ITAA 1997 292-102(1)(b)
ITAA 1997 292-102(1)(c)
ITAA 1997 292-102(1)(d)
ITAA 1997 292-102(1)(d)(i)
ITAA 1997 292-102(1)(d)(ii)
ITAA 1997 292-102(1)(e)
ITAA 1997 292-102(1)(f)
ITAA 1997 292-102(1)(g)
ITAA 1997 292-102(1)(h)
ITAA 1997 292-102(1)(i)
ITAA 1997 292-102(2)
ITAA 1997 292-102(2)(a)(i)
ITAA 1997 292-102(2)(a)(ii)
ITAA 1997 292-102(2)(b)
ITAA 1997 292-102(3)
ITAA 1997 292-102(5)
ITAA 1997 292-102(8)
ITAA 1997 960-505
ITAA 1997 995-1
ITAA 1936
ITAA 1936 Pt IVA
Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures No. 1) Act 2017
Superannuation Industry (Supervision) Regulations 1994 7.04(1)