With Treasury Laws Amendment (2022 Measures No. 2) Bill 2022 receiving royal assent in mid-December last year, the eligibility age for making downsizer contributions has been reduced to age 55 as of 1 January this year from 60.

This means eligible individuals aged 55 years and older can now choose to make a downsizer contribution into their super fund of up to $300,000 per person or $600,000 per couple, from the proceeds of selling their home.

Speaking on the most recent SuperConcepts podcast, senior SMSF technical specialist Anthony Cullen explained SMSF advisers need to ensure a client’s trust deed permits downsizer contributions before actioning the transfer.

“It shouldn’t be too much of a problem with most modern deeds. If you’ve recently set up your fund or updated the deed, it shouldn’t be a problem,” Mr Cullen said.

“But if you’re still operating under an older deed, you may actually need to check that the deed allows for downsizer contributions.”

What changes mean for FY 2022–23

Given recent changes to legislation, Mr Cullen explained that in the 2022–23 financial year there are two age brackets that need to be heeded when making downsizer contributions.

“Age is measured at the time that you’re making a contribution not necessarily when you entered or settled the contract,” Mr Cullen highlighted.

“So, you could see a scenario where a 54-year-old enters into a contract and goes through the settlement of their property, but one of the other criteria is that you would need to make a contribution within 90 days of settlement. So, you could be 54 when you settle but if you turn 55 in those 90 days, you potentially still make that downsizer contribution,” he added.

Mr Cullen explained that when making a claim as a couple, both names do not need to be on the contract.

“That would certainly help a lot of the older generation who maybe have held their properties for a very long time from a period when generally only the husband’s name appeared on the contract.”

Another important point, he noted, relates to the capital gains tax (CGT) rules and provisions. Namely, the property must be identified as the individual’s principal place of residence and be subject to a CGT exemption.

Moreover, Mr Cullen explained that despite the measure’s name, individuals do not have to downsize their home, nor do they have to buy a second home.

“We always call it downsizer contribution and we go back to the measure was to encourage people to downsize and move to smaller homes, but there is nothing in the law that requires you to downsize,” he said.

“And what does downsize mean? You might sell a large, five-bedroom home in the suburbs and move to a seaside two-bedroom which costs more … You can also jump into a caravan if you want.”

With the eligible age bracket dropping to 55, Mr Cullen warned those looking to use the re-contribution strategy in reverse need to think twice if they’re of a certain age.

The re-contribution strategy involves withdrawing some or all of one’s superannuation balance and re-contributing the amount as a non-concessional contribution.

“Now that we’ve seen the age drop down to 55, there’s not going to be too many 55-year-olds that have met a condition of release, so if they make that contribution to super there is every chance that they’re not going to be able to access it again,” Mr Cullen warned.

“That’s a very important point for everybody under the age of 65.”

Special reporting requirements

Mr Cullen also highlighted the special reporting requirements downsizer contributions are subject to.

“The main point is that you need to notify the trustees that you are treating it as a downsizer contribution. There’s a specific form,” he said.

“It’s absolutely imperative that you give that to the trustees at the time or before you make the contribution. If you don’t do that, that contribution is going to be treated as a non-concessional contribution.”

Moreover, he noted the form doesn’t need to be provided to the ATO.

“The trustees need to hold it on file,” he said, adding that the auditors will generally ask for it.

“Having said that, there is a section in the SMSF return under the member section, section F, that the trustees of the fund will report the downsizer contribution as a separate contribution received by the fund and that’s how the ATO becomes aware of it,” Mr Cullen added.

Downsizer contributions could rise as inflationary pressures bite

Earlier this month, Tim Miller, technical and education manager for Smarter SMSF, said in terms of downsizer contribution-related age changes it will be interesting to see where SMSF members will sit with real estate investments, non-concessional contributions, and the indexation of the transfer balance cap as living expenses continue to rise.

“Coming up to 30 June it will be interesting to see what happens, primarily because of the indexation of the general transfer balance cap to $1.9 million from 1 July,” he said.

“It begs the question of whether people will be implementing non-concessional contribution strategies this year, or next year, with a higher balance and how many non-concessional strategies will be used.

“Certainly, from a concessional contribution strategy point of view, we’re certainly, I think, going to see a lot of people looking to utilise their carry forward concessional contribution strategy to maximise capacity or to claim personal tax deductions.”

Mr Miller said inflationary pressures will probably impact contributions to some extent, as well.