In This Issue
Dear Friends
Got a weekender? Don’t forget the Downsizer contribution.
Many people are now aware that if you downsize your home for a smaller residence, there is potential to make additional contributions to super (up to $600,000 per couple or $300,000 as a single person) without these payments being subject to the normal super contribution rules.
There are some provisos, chiefly:
- You must be over 55 years of age (there is currently no maximum age)
- The property must be in Australia and be an actual building (ie, not a caravan)
- You must have owned the property for at least 10 years and it was your ‘Principal Place of Residence (ie, exempt or partially exempt from Capital Gains Tax)
- You must make the contribution within 90 days of receiving the money from the sale
- It is your first and only downsizer contribution
The appropriate ATO downsizer contribution form needs to be lodged with your super fund either before or when you make the contribution.
Still, many people will dismiss the downsizer strategy as being ‘not available’ to them.
But if you have a ‘weekender’, holiday house, a ‘shack’ (if you live in Tasmania) or even a hobby farm, a less linear approach to interpreting the legislation can present a tremendous opportunity – if you can decide – and declare – which of the two properties is your Principal Place of Residence (PPR).
To demonstrate how such a strategy could work, let’s consider the case of a recently retired couple with a lovely city home and an even more attractive holiday home, with the latter valued less than their city abode. They currently split their time between the two, but recognised that in their 70s, the physical work required to maintain two properties, the driving and the distance from medical and social support will mean that with some regret, the holiday house will need to be sold at some future stage.
Now, this couple have always thought of their city residence as their home, and their reasoning would suggest they are not eligible to access the Downsizer opportunity.
However, if they declare the holiday house as their principal residence, enrol to vote at that address, have their professional services addresses updated – and maintain this status for just one year, the holiday house becomes their PPR.
When that property is sold, proceeds of up to $300,000 per person can be contributed to their super, provided the contributions are made within 90 days, with concurrent lodgement of correct ATO form.
After one year, to mitigate any Capital Gains Tax liability, they can again complete the PPR nomination process to return their city home to principal residence status. In the above example, if their city residence was owned for 20 years, and re-nominated as the PPR after one year, our couple would have a proportionate CGT liability based on the period it was NOT nominated as their PPR ie, 1 year – resulting in only 5% of the capital gain being subject to CGT.
But this is the helicopter view; you will still need to zoom in to check the fine print – AND make sure you get professional advice.
For example:
- There is a formal notification process which must be correctly followed to nominate a second home as your principal place of residence.
- To benefit from the Downsizer contribution, as mentioned above, it is a requirement to have owned the property for at least 10 years. (For couples, only one member needs to satisfy the ownership requirements to allow both to make a Downsizer contribution).
- You won’t be able to access the super you contribute as a Downsizer contribution until you meet a condition of release.
- It will necessary to consider what, if any Capital Gains Tax liability* applies to either of the properties – hence the importance of getting appropriate financial/taxation/accounting advice.
- You are only eligible to apply the Downsizer contribution rules once. At say, a 5% pa return on the maximum contribution, however, that’s an additional tax free $30,000 pa for any Downsizer couple)!
On the other hand, if the sale of your declared PPR nets more than the maximum $600,000 Downsizer contribution, and your TBC is below $1.9m, you still can make non-concessional superannuation contributions of up to $330,000 each over three years, provided you are younger than 75^ at the time.
And by the way, if you have taken advantage of the Downsizer opportunity to get additional funds into the tax-free superannuation environment, and you have the financial wherewithal, there is currently nothing in the legislation to stop you from buying a bigger home after the process is complete.
The Downsizer contribution has proved to be a very sensible way to help people get more funds into super to fund their retirement, and this is the purpose of superannuation, after all.
If you believe you may be able to benefit from a downsizer strategy, if I or any of our team can assist, as always, please don’t hesitate to get in touch.
And One More Thing – Vale Charlie Munger
Few readers will have heard of Charlie Munger, who passed away age 99, on 28th November 2023; he was Vice Chairman of Berkshire Hathaway – and my investing hero Warren Buffett’s right-hand man and mentor.
Charlie’s wisdom can be summed up in this quote, which I just love. In fact, I love it so much I follow his theory – and recommend it to my clients and family:
‘The big money is not in the buying and the selling, but in the waiting.’
*Properties purchased prior to September 1983, are CGT exempt.
^After age 75 your fund can only accept Super Guarantee contributions based on any paid work and of course, downsizer contributions.
Don’t Forget: https://www.cyber.gov.au/protect-yourself
As always, if I or any of the staff can be of assistance, please don’t hesitate to contact us on (08) 8130 5130 or via admin@marinisgroup.com.au
Yours sincerely
Theo Marinis CFP®, B.A., B.Ec., CPA., MCIFAA
Financial Strategist
Authorised Representative