Downsizer contribution - example

Jane and Bill purchased a house on 1 July 2006 and occupied that house as their principal place of residence since that time. On 31 December 2018, when they are each age 80, they sell the house in order to move to more suitable accommodation. The sale releases $400,000 which they decide to invest. As the $400,000 represents the sale proceeds of a house which they have held for more than 10 years and the house was used as their principal place of residence they can use all or part of the $400,000 to make downsizer contributions.

As they are co-owners of the house they could make the following downsizer contributions:

(a) Jane from her share of the $400,000 makes a $200,000 downsizer contribution for herself and Bill from his share also makes a $200,000 downsizer contribution for himself; or

(b) Jane from her share of the $400,000 makes a $200,000 downsizer contribution for herself and Bill from his share makes a $100,000 downsizer contribution for Jane and a $100,000 downsizer contribution for himself.

Bill and Jane choose option (b) and make the contributions on 14 February 2019. As Jane’s transfer balance account is $1,200,000 and by making $300,000 downsizer contributions for Jane, her transfer balance cap will remain under the $1.6m limit. As Jane has received $300,000 of downsizer contributions, no further downsizer contributions can be made for her – as the $300,000 is a lifetime cap. As Bill has already exhausted his transfer balance cap, as his balance is $1.6m, he can still make downsizer contributions. However, these contributions will form part of his accumulation interest, the earnings on which will be taxed at 15%.

Bill could make a downsizer contribution for Jane as Jane is his spouse (at the time the contribution is made) and the source of the contribution was his interest in the residence which was sold at the same time as Jane sold her interest in the residence.

This example illustrates a number of features of “downsizer contributions”, namely

there is a lifetime cap of $300,000 per taxpayer on downsizer contributions (and the legislation does not propose an indexation mechanism for the cap);
if one spouse cannot fully utilise the $300,000 cap, the unused portion cannot be transferred to the other spouse;
downsizer contributions can only be made if the beneficiary of the contribution (ie taxpayer for whom the contribution is made) is aged 65 or more;
there is no upper age limit by which downsizer contributions may be made – Jane could have been 90 or 95;
downsizer contributions can be made whether or not the beneficiary of the contribution satisfies the work test – in this case neither Jane nor Bill satisfy the work test;
while Bill was aged 80 in the example, if Bill was aged 60, he could still have made a downsizer contribution for Jane as it is the age of the beneficiary of the contribution which is relevant. If Bill was aged 60 he could not make a downsizer contribution for himself (and Jane could not have made a downsizer contribution for him either).
the contributions must be made within 90 days of settlement of the sale.

An exposure draft of the taxation provisions relating to ‘downsizer contributions” was released for public comment on 21 July 2017. The “downsizer contributions” provisions were released in Bill form on 7 September 2017 as Schedule 2 to the Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures No 1) Bill 2017. This Paper is based upon the text of the provisions as set in the Bill. To date, no draft of the required changes to the Superannuation Industry (Supervision) Regulations has been released.