Q: We have recently retired and are planning to sell our family home for something smaller. We are thinking of using the home downsizer scheme to top up our super but have heard there are a few traps for the unwary. What can you advise?
A: The tax office says it is seeing some common mistakes in the way people are using the home downsizer measure.
It says not all applicants for the benefit are aware that they or their spouse must have owned their home for 10 years or more prior to sale.
Another common error is not understanding that the benefit only applies to sales where the date of the contract of sale is 1 July 2018 or later.
The ATO says the proceeds from the sale of the home must be either exempt or partially exempt from capital gains tax under the main residence exemption, or would be entitled to such an exemption if the home was a CGT rather than a pre-CGT asset.
Under the downsizer rules, a person aged 65 or over can make a non-concessional superannuation contribution of up to $300,000 from the proceeds of selling their home. There is no upper age limit.
The measure applies to the sale of a principal residence owned for the 10 years or more.
Both members of a couple will be able to take advantage of this measure for the same home.
These contributions will be in addition to those currently permitted under existing caps, the age test, work test and $1.6 million limit on non-concessional contributions.
It is worth noting that the transfer balance cap still applies, so if you already have $1.6 million in pension phase, the contribution will have to go into accumulation.
It is also important to note that the downsizing contribution must be made within 90 days of receiving the sale proceeds.
There is no actual requirement to “downsize”. People can buy a new home for more or less than the value of their existing home, or they can opt not to buy a new home at all.
The proceeds will count towards Centrelink and Department of Veterans’ Affairs income and assets tests.
The ATO says that if a contribution is found to be ineligible, it could be treated as a non-concessional contribution and that may result in an excess non-concessional contribution determination.
False and misleading penalties may also apply.