SMSF Downsizer Contributions

How do downsizer contributions work with my SMSF?

SMSF Downsizer ContributionsFor many years, housing affordability has been an issue in Australia. As a solution, the government introduced a measure in the 2017 Budget allowing older Australians to utilize the proceeds of the sale of their family home into their superannuation without it counting towards any contribution caps. The goal is to encourage the elderly to downsize from larger homes, which are no longer suitable for their needs, to free up housing for younger and growing families while boosting retirement assets.

Like with most things there are a few considerations you need to make before deciding to make a downsizer contribution.

How it works

If you are 60 years old or above from 1 July 2022, you are eligible to contribute to your super fund up to $300,000 from the proceeds of selling your home. This means an eligible couple can contribute up to $600,000 (i.e. $300,000 each) into their Self Managed Superannuation Fund from the sale of the family home. The contribution will not be counted towards either your concessional or non-concessional contribution caps.

There is an added advantage as well – with the downsizer contribution option, more members can contribute to their SMSF as the following restrictions do not apply:

  • No contributions are allowed for individuals over 75 years old;
  • Non-concessional contributions are not permitted for funds with a total balance exceeding $1.7 million.

This means that if you are over 75, and/or have a total superannuation balance above $1.7 million you are still able to utilize the downsizer contribution.

Am I eligible for a downsizer contribution?

Before making the contribution you need to ensure you meet all of the following conditions;

  • You have reached the eligible age (60 or older) on the date you make the downsizer contribution. Note: The eligible age prior to 1 July 2022 was 65 years old before it was changed to 60 years old.
  • You, or your spouse, must have owned the home for at least 10 years before the sale.
  • The home must be in Australia and is not a caravan, houseboat or any other type of mobile home.
  • The home was classed as your main residence and therefore exempt from Capital Gains Tax (CGT).
  • Before making your downsizer contribution, you will need to have completed and signed a Downsizer Contribution Form. We can assist you in completing this form as part of our service.
  • You make the deposit to your SMSF within 90 days of receiving the proceeds of the sale (usually at the date of settlement).
  • You have not previously made a downsizer contribution to your super from the sale of another home or part sale of your home (such as a subdivision).

What happens if the property is only in the name of one person?  Can a couple still make a contribution together?

If the property is only in your name or just in your spouse’s name, both can still make the downsizer contribution of up to $600,000 ($300,000 each) provided all the other eligibility conditions are met.

What if a contribution was already made, but it was determined that the eligibility requirements were not met?

If you made a downsizer contribution on the assumption that it was acceptable but later discovered that you were ineligible, the SMSF will then see if the contribution can be accepted as a personal contribution under the standard contribution rules (age, total super balance, and contribution cap limits).

If so, the SMSF will then it will count towards the contribution to your relevant contribution cap.  This may mean you will also be liable or excess contributions if the amount exceeds your available cap.

On the other hand, if the SMSF cannot accept the contribution, it should be returned to you within 30 days from the original deposit date.

What are the steps to making a downsizer contribution to an SMSF?

Step 1: Check that you meet all the eligibility requirements.

Step 2: If you are receiving the age pension, or intending to apply, consider how the sale of your home and downsizer contribution can affect your entitlement.  Depending on your circumstances, your benefit may be reduced.

Step 3: Contact us!  We can confirm your eligibility and assist in completing the Downsizer Contribution Form required to make the deposit to your SMSF.  We recommend doing this once you have accepted a contract for the sale of your home. 

Step 4: Deposit the contribution to the SMSF within 90 days from the settlement of the sale.

Downsizer Contributions: Important Things to Remember

Some reminders and considerations to think about when you’re planning to make downsizer contributions:

  • The downsizer contribution amount has a limit of $300,000 per individual and cannot exceed the actual sale proceeds of the home. For example if you sell for $700,000 you are still limited to a maximum of $300,000 or $600,000 per couple.
  • The downsizer contribution does not count towards the contribution caps, however will forms part of your tax-free component of your member balance which is beneficial for estate planning purposes.
  • The contribution is still allowed even if a member has a total superannuation balance of over $1.7 million.
  • However, the contribution will increase the member total super balance the following year as this amount is recalculated each financial year.
  • If you commence a pension from the contribution the amount will be counted towards the Transfer Balance Cap.
  • You can only use the Downsizer Contributions from selling one home and can’t be used again for selling a second home. You can however make multiple deposits provided the proceeds are all from the same sale.
  • You don’t need to purchase a new home after selling the family home and making the contribution.
  • Downsizer contributions will be taken into account to determine the eligibility for the age of pension (proceeds in an SMSF count towards the asset and income test).

Other Types of Assets

An INHA can be acquired by the Fund and contributed as a member contribution provided it does not exceed the 5% limit on INHA owned by the Fund at the time of purchase. The Fund cannot acquire an asset from a member unless it comes within one of the exceptions or it is an INHA. The Fund cannot acquire shares from a member when those shares are owned in an unrelated company. This doesn’t appear logical as the Fund can directly acquire shares in an unrelated company but if acquiring the unrelated shares from a member it is prohibited.

5% in-house asset limit (INHA)– A fund can only acquire an INHA if the existing INHA assets and the INHA to be purchased do not exceed 5% of the fund’s assets at the time of purchase. The In house assets rules are very complex and have a material effect on purchasing assets into your SMSF when connected with one of the members or their associates. 

TIP – Assets that cannot be acquired directly from a member include a loan to a member or a relative of a member.

A residential swelling owned by the member is unable to be transferred to the Fund unless it is being used for business purposes ie the property is held as part of a land developer’s business. It may be possible to transfer a residential dwelling subject to the 5% in-house asset limit BUT in most cases the Fund would exceed the limit prohibiting the acquisition.

A Fund cannot acquire shares from a member when the shares are from an unrelated company (the unrelated shares do not fit within one of the exceptions allowed under the Super Rules). Interestingly, if the shares are in a related company the shares could be purchased subject to the 5% limit for in-house assets.

Transfer of an Asset | Market Value Rules  

It is critical to ensure when you contribute or transfer assets it is allowed by the super rules and also that the asset transferred is valued immediately before it is transferred or contributed to an SMSF. Valuations can easily be obtained for listed securities and for most managed funds but property, and other assets are more problematic.

The market valuation of direct property and underlying property owned by a unit trust or a company receives a lot of attention by the tax office. Remember the in specie asset transfers must always be able to be proved to be at fair value. 

The ATO accept the following as evidence of market valuation for properties:

  • A real estate valuation from RP Data or similar valuation software which includes a couple of comparable sales
  • A recent arms length purchase between unrelated parties
  • A formal written valuation from a qualified valuer

It is important to look through a unit trust or a company which is being acquired to ensure it is valued prior to transferring from a member to the Fund. Underlying property can be valued as per the above but other assets and liabilities of the unit trust/company should be reviewed as well.

In-Specie Contribution vs In-Specie Transfer to your SMSF

An In Specie Contribution is a non cash transaction from the member to the Fund and a non cash purchase of an asset by the Fund.

An In Specie transfer of an asset to the Fund is a non cash transfer of an asset which can be made from a member, trustee, employer or other party to the Fund where cash is paid from the fund to purchase the asset. Of course the asset must be one which the Fund is able to purchase under the super rules.

An In Specie transfer of an asset/s can be made as part of a rollover of benefits from one SMSF to another super fund. Similar to previous discussions the asset must be valued at or near the date of transfer and represent the value of the rollover and is a non cash transaction between the two funds.

The Process of Transferring an Asset from A Member to the Fund

It is important to ensure the title of the asset is transferred from the member to the Fund. The legal title should be transferred to the trustee of the Fund. Where possible the title should also include the designation for the Fund. NSW land titles do not allow the Fund designation on the title but not all states have the same regulations.

Off market transfers are typically used to transfer shares. The form must be prepared correctly in accordance with the appropriate share registry and signed by the member and by the trustee of the Fund and show the number of shares and the date. The market valuation should be the valuation on the date indicated on the off market transfer form. Retain a copy of the form for the auditor.

Transfers of property should be prepared by a qualified solicitor or conveyancer who will assist in changing the title through the appropriate office of state revenue and have the transfer assessed for stamp duty.

To be transparent a request should be prepared by the member identifying what the asset is to be transferred and how the contribution is to be allocated as well as the amount and provide evidence of the market valuation. The trustee is required to have a meeting to table the request and resolve what to do. A confirmation letter should be sent to the member.

A member electing to make a member concessional contribution is required to prepare S290 paperwork which includes a notice of intent to claim a personal tax deduction. The trustee should minute this and send a confirmation letter to the member to acknowledge acceptance of the concessional contribution. Time frames exist to claim the tax deduction and if missed the contribution may be forfeited. Thus it is best to prepare and sign the paperwork on the date the contribution is made.

Other Compliance and Legal Considerations to make an in specie transfer

The following should be considered when thinking of transferring an asset to the Fund:

  • Consider contribution caps for the member. Consider maxing out the contribution caps via the asset purchase by the SMSF being partly treated as a contribution and the remainder using cash or other assets Particularly useful if the market value of a property is more than the available caps. As a reminder the types of contributions are called Non-Concessional which are not tax deductible personally and Concessional Contributions which are and each have their own individual caps under legislation. 
  • Tip The ATO’s view in LCR 2021/2 (ATO Law Companion Ruling) indicates the cash paid and the in specie contribution are 2 different interests in the property which should be shown via 2 separate transfer documents. It is critical to prepare paperwork which recognises the 2 interests to avoid the possibility of the ATO applying NALI (non arms length income) which could result in paying additional tax, at your marginal tax rate, on the income (including capital gains on sale) earned in relation to the property.
  • Total Superannuation Balance should always be considered when a member’s balance is increased.
  • Stamp Duty is required to be assessed and may be payable on transferring property assets into an SMSF.
  • GST to be reviewed as the Fund may need to be registered. An exemption may be available in relation to transfer of a property.
  • Land tax to be reviewed in relation to property transfers.
  • Consider the asset being transferred will be retained in the Fund until your preservation age and you satisfy a condition of release ie turning 65 is a condition of release.

Personal Taxes | Capital Gains Tax 

Capital Gains may be payable when transferring assets to your SMSF if the market value of the asset being transferred exceeds the cost base of the asset being transferred. For example an in specie property transfer to SMSF for half a million dollars when the commercial property was purchased for only quarter of a million means that the in specie transfer CGT event for the taxpayer would be the quarter of a million dollars of paper profit caused by the increase in value. In the event of the property is transferred to an SMSF as part of a contribution strategy then this may help reduce the tax depending on the concessional limits available to the taxpayer but otherwise this strategy may result in tax payable on paper profits while the taxpayer has no additional cash from the transaction. Keep in mind the transfer is deemed to occur at market value so trying to just complete the transfer of the asset for a lower value will not avoid the tax problem. 

 Contact Us 

If you are considering whether an in specie contribution is right for you and want to understand more about what is an off market transfer, the type of transfers permissible or the mechanics to make an in-specie transfer please reach out to one of our friendly team and we will be happy to help you understand what is involved in transferring assets, the savings by transferring and the rules and regulations. 

Do you want to learn more about SMSF Downsizer Contributions?

Give us a call on 1300 392 544 or get in touch online.

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If you’re interested in learning more about SMSF Downsizer Contributions? Please reach out for a confidential quote. Simply submit your details and one of our friendly team will be in touch as soon as possible.

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Do you want to learn more about SMSF Downsizer Contributions?

Give us a call on 1300 392 544 or fill in the form above

Contact Us

If you’re interested in learning more about SMSF Downsizer Contributions? Please reach out for a confidential quote. Simply submit your details and one of our friendly team will be in touch as soon as possible.

Contact Us

Name(Required)