Enhancing retirement outcomes using downsizer contributions

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Enhancing retirement outcomes using downsizer contributions

 

Legislation to make superannuation downsizer contributions (downsizer contributions)

has now passed enabling individuals who are 65 or over to contribute proceeds from the

sale of one eligible property to superannuation without needing to satisfy the work test.

The new rules provide more flexibility for retirees to fund their retirement using capital

released from their homes. From 1 July 2018, retirees can make downsizer contributions

and use the contributions to access superannuation retirement income products (subject

to their transfer balance caps).

 

Downsizer contributions are also exempt from the concessional and non-concessional

contribution rules and provide scope for retirees in different situations to enhance their

retirement outcomes.

 

This article will examine the rules around making downsizer contributions.

 

Eligibility

For a contribution to be a downsizer contribution, the following conditions will need to

be met:

  • At the time of the contribution, the individual is 65 or over (there is no upper age limit)
  • The contribution is in relation to the sale of an eligible property (see below) that the

individual or their spouse owned just prior to the sale, and where the contract of

sale was entered into on or after 1 July 2018 (there is no requirement to purchase

another property)

  • The total amount of downsizer contributions in respect of an eligible property does not

exceed the capital proceeds, or $300,000 per individual

  • The contribution is made within 90 days after the change in ownership of the property

(usually the settlement date) unless the Commissioner has allowed a longer period; and

  • The contribution is made using the approved form.

Cap on the amount of downsizer contributions

The amount of downsizer contributions is not governed by an individual’s concessional or

non-concessional caps (or their total super balance) and can be made in addition to these

contributions. However, the amount that can be contributed is capped at the lesser of:

  • $300,000 for each individual; and
  • the capital proceeds received (before any mortgage repayments).

For example, if a couple received $600,000 from the sale of an eligible property, they can

each contribute up to $300,000 as a downsizer contribution. If their property was sold

for $500,000 instead, the most they could contribute is $500,000 between them up to

$300,000 for each person (the combination does not matter) i.e. each could contribute

$250,000 or have one person contribute $300,000 and the other $200,000.

Importantly, downsizer contributions are not deductible and cannot be made in respect

of a second property regardless of how much was contributed for the first.

Although contributions can only be made in respect of one eligible property, multiple

contributions can be made for that property (to different superannuation funds for example)

if it is made within the above cap and timeframe (90 days).

Eligible property

For the property to be an eligible property, it must be located in Australia and cannot be a

caravan, houseboat or mobile home. In addition:

  • The property must have been owned by the individual, their spouse or their former spouse

for 10 continuous years just before the sale of the property. This means the 10-year period

is still met where ownership changes between spouses (e.g. relationship breakdown

or death of a spouse) during the period.

 

The 10-year period is calculated from theday the ownership commenced to the day it ceased (usually the settlement dates). There are certain events that do not ‘break’ the continuous 10-year period

including where:

–– a property was vacant because it was destroyed or knocked down and a new home

built; or

–– a substitute property was purchased and owned for less than 10 years because the

former property was compulsorily acquired. However, the former property had to have

been initially acquired at least 10 years prior to the sale of the substitute property.

Note that all conditions of section 118-47(1) of the Income Tax Assessment Act 1997

(ITAA97) need to be met in relation to the purchase of the substitute property, including

the requirement that the substitute property was purchased within a year after the end

of the financial year that the former property was compulsorily acquired.

and;

  • The individual must satisfy all requirements (apart from the fact that their spouse

owned the property) to qualify for a full or a part main residence capital gains tax (CGT)

exemption for that property. The property does not need to be the individual’s main

residence for the entire 10-year period or at the time of sale. It also does not need to be

owned by both members of a couple for each of them to make downsizer contributions.

For properties acquired before 20 September 1985 (pre-CGT asset), this requirement is still

met if the individual would have qualified for a full or part main residence CGT exemption

had the property been a CGT asset (it was not an investment property for the entire time

it was owned).

 

If you have questions or are considering downsizing, please contact your planner on 03 9851 0300

 

How your assets will be distributed if you don’t have a Will

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How your assets will be distributed if you don’t have a Will

 

Most of us accept that a valid Will is essential to determine how your estate is dealt with when you die. Your Will can appoint a family member or trusted friend to administer your estate, nominate guardians for young children, determine who will benefit, and create trusts to protect assets and safeguard vulnerable beneficiaries.

Without a Will, the administration and finalisation of your estate could be left to somebody you would not wish to involve, and the distribution of your assets will be pre-determined by legislation – an unfortunate outcome for a family who is already grieving.

 

Changes to intestacy laws

The Administration and Probate and Other Acts Amendment (Succession and Related Matters) Act 2017 (Vic) has brought about various changes to estate and succession laws.

Of interest to those readers who keep putting off preparing a Will, are the reforms affecting how your estate will be distributed when you die without one. Whilst the laws aim to promote fairness for family members left behind by a person who dies without a Will, they are a timely reminder of the restrictive formula that applies when distributing an intestate estate.

Essentially, the legislation decides who gets what from your estate, unless a disgruntled family member contests the proposed distribution. In such cases, the application fuels conflict within the family, adds to the emotional turmoil and potentially depletes estate assets. Even more reason to get that Will prepared now!

 

Distribution of an intestate estate

Essentially, the reforms improve the position of a partner (spouse or de facto) of a deceased intestate person. The following summarises how statutory distribution will apply for partners of an intestate person who dies on or after 1 November 2017.

 

One partner and no children

The partner takes the whole of the estate – this is unchanged from the previous position.

 

One surviving partner and a child or children also of that partner

Previously where there was a child or children of the deceased and surviving partner, the partner would take the personal chattels, a legacy of $100,000, and one-third of the balance of the estate. The remaining two-thirds of the estate would be distributed equally between the surviving child or children. This was problematic in that it could leave the partner and remaining family with little financial security.

The statutory-imposed division of the estate would mean that, frequently the family home would need to be sold to provide the share allocated for the child or children of the relationship, even though they were the children of the deceased and his or her partner. Such circumstances would cause unnecessary upheaval and distress.

The laws now provide that when a person dies intestate leaving one partner and a child or children also of that partner, the partner will take the whole estate (unless there is more than one partner or a child or children of the deceased who is not also a child of the partner – see below).

 

One surviving partner and a child or children not of that partner

In this case a statutory legacy (currently $451,909) applies. If the estate is worth equal to or less than the statutory legacy, the partner will inherit the residuary estate. If, however, the estate value exceeds the statutory legacy, the distribution is:

 the partner receives the personal chattels, the statutory legacy amount (and any interest if applicable) and half of the balance of the residuary estate; and

 the children of the deceased share equally in the remaining half of the residuary estate.

 

Multiple partners – with or without children

If the deceased leaves multiple partners with or without children, the distribution of the estate is in accordance with complex and restrictive provisions and may also necessitate an application for a distribution order.

 

No partners – children

The estate is divided equally between a surviving child or children. If a child of the deceased has died, then that child’s share will be taken by his or her surviving child and if more than one, equally.