DOWNSIZER CONTRIBUTIONS AND SELF MANAGED SUPERANNUATION FUNDS

The downsizer contributions legislation, which allows homeowners aged 65 years or over to contribute up to $300,000 each into super as a tax free contribution came into effect on 1 July 2018.

How do downsizer contributions work?

There are three steps that need to be applied if a member would like to make downsizer contributions.  We have summarized these below including some important points.

Step 1 – Confirm Eligibility

The first step is to confirm that the contribution/s will be eligible. Broadly, an eligible downsizer contribution is where:

• the contribution is made to a complying super fund by a member aged 65 years or older. There is no age limit or gainful employment test that needs to be satisfied;
• the amount the member is contributing is equal to all or part of the capital proceeds received in respect of the sale of a dwelling in Australia that qualifies as a main residence under the downsizer provisions;
• the dwelling must be a fixed structure to qualify (Proceeds from the sale of houseboats, caravans, and other forms of mobile homes do not qualify);
• the member or the member’s spouse had an interest in the main residence before the disposal; (a new spouse can qualify if they have lived at the residence for two years);
• the interest in the main residence was held by the member or their spouse for 10 years or more prior to the sale – the ownership period is generally calculated from the date of settlement of purchase to the date of settlement of sale;
• the member has not previously made downsizer contributions in relation to an earlier disposal of a main residence (i.e. this is a once-off measure).

Step 2 – Making Contribution/s

Upon the sale of a main residence a member can make up to a maximum of $300,000 in downsizer contributions to their super fund.

The downsizer contribution:

• is not a non-concessional contribution and will not be counted towards the relevant member’s contribution caps;
• can still be made even if a member has a total super balance greater than $1.6 million;
• will not affect a member’s total super balance until their total super balance is re-calculated to include all contributions, including the downsizer contributions, on 30 June at the end of the financial year;
• will also count towards a members transfer balance cap, currently set at $1.6 million. This cap applies when you move your super savings into retirement phase;
• option for in specie contribution to be made in lieu of cash proceeds;
• the funds do not have to come from the proceeds of the family home e.g. The ‘downsizer’ new home may actually cost more than the family home that was sold but if other funds are available, the contribution can still be made;
• there is no requirement to buy a new home after the family home is sold.

Once the member sells their main residence, they are required to make the downsizer contributions to their super fund within 90 days of receiving the proceeds of sale, which is usually at the date of settlement. Given this 90 day timeframe, a member cannot make downsizer contributions if settlement is on vendor terms that go beyond 90 days (unless an extension has been granted by the ATO under certain circumstances).

The “Downsizer Contribution Into Super” form should be completed and given to the superfund’s trustee either before or at the time of making the downsizer contribution.

While multiple downsizer contributions in respect of the sale of the same residence can be made, the total amount of downsizer contributions made by each member cannot exceed $300,000. This total amount includes the amount of all downsizer contributions a member makes in respect of all of their superannuation funds.

It is important to note that the $300,000 downsizer contribution cap is for only one member, therefore this would potentially allow for additional contributions of $600,000 for a couple (ie, 2 x $300,000).

Example 1 – Bob and Mary, sell their home for $800,000. Each spouse can make a contribution of up to $300,000.

Example 2 – Fred and Betty, sell their home for $400,000. The maximum contribution both can make cannot exceed $400,000 in total (being the sale proceeds). This means they can choose to contribute half ($200,000) each, or split it – for example, $300,000 for Betty and $100,000 for Bruce.

Step 3 – Reporting and Verification

The super fund must inform the ATO of receipt of the downsizer contribution form during the super fund’s annual reporting. The ATO will then run verification checks on the amount and may contact the member for further information.

If the ATO identify that the contribution does not qualify as a downsizer contribution they will notify the superannuation provider. Once notified, the fund will assess whether the contribution could have been made as a personal contribution under the contributions acceptance rules. If the contribution could be accepted, the amount will count towards the relevant contribution cap and may result in the member exceeding their cap. If the contribution can’t be accepted, the contribution amount will be returned to the member by the super fund.

False and misleading penalties may be applied if the ATO identify that a downsizer contribution was not eligible and had been incorrectly declared.

Other points to consider

• The super fund trust deed must allow for the fund to accept the downsizer contributions. Please note if you have a SuperCentral Trust Deed and are participating in the annual renewal service, your SMSF can accept Downsizer Contributions as the SuperCentral Governing Rules were updated on 8 May 2018 to include provision for these contributions.
• Members should note that disposing of their main residence and contributing downsizer contributions to their super fund may impact on their Centrelink entitlements. Generally a person’s family home is not taken into account for determining eligibility for the age pension, however superannuation savings are taken into account once a member reaches pension age. This means that if a member disposes of their main residence and makes a downsizer contribution, it will generally be taken into account for determining eligibility for the age pension.
• Members should also be aware that downsizer contributions are not deductible.
• There is no requirement to buy a new home after the family home is sold.

Please contact our Superannuation Manager Helen Cooper on 08 9316 7000 should you wish to discuss your specific circumstances in more detail.

Any information provided in this article is general in nature and does not take into account your personal objectives, situation or needs. The information is objectively ascertainable and was not intended to imply any recommendation or opinion about a financial product. This does not constitute financial produce advice under the Corporations Act 2001.

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ATO TARGETS WORK-RELATED DEDUCTIONS

One of the main ATO audit targets for this tax season is work-related deductions.  The ATO is of the view that many taxpayers are claiming deductions for items that they have not incurred expenses for or are over-claiming their deductions.

To claim a work-related deduction, the expense must directly relate to earning your income, you must have spent the money yourself and weren’t reimbursed, and you must have a record of the expense as proof.  If the expense was for both work and private purposes, you can only claim a deduction for the work-related portion.

The categories that fall within the work-related deductions are the following:

• work-related motor vehicle
• work-related clothing and laundry
• other work-related deductions

For work-related motor vehicle claims, the ATO wants to remind taxpayers that generally travel between home and work, is considered private travel and therefore, no deduction is available.  Even if you are completing minor work-related activities on the way to work from home, such as collecting the mail, this is still considered private travel by the ATO.  However, you are able to claim the kilometres from home to work if you are required by your employer to carry bulky tools or equipment to use in your work which cannot be left at your workplace, such as an extension ladder or generator.

Last year around six million people claimed work-related clothing and laundry expenses, which added up to nearly $1.8 billion.  While the ATO acknowledges that many of these claims are legitimate, they are of the belief that half of the taxpayers in this category do not even wear uniforms, protective clothing, or occupation-specific clothing.

To claim a deduction for the purchase of a compulsory work uniform, a taxpayer must incur expenses on the purchase of a distinctive uniform that clearly identifies the taxpayer as an employee of the organisation, and the company has a strictly enforced policy that makes it compulsory for employees to wear the uniform while at work.  The difference for claiming a deduction for the purchase of a non-compulsory uniform is that the expenditure is only deductible if the uniform is registered with AusIndustry.  If your uniform meets these requirements then you are also able to claim for the costs of washing, drying and ironing the uniform.

In the 2018 Federal Budget the ATO was handed additional funding to increase audit and review actions on taxpayers.  So, it is highly likely that we will start to see more reviews and audits of taxpayers’ deductions in this area in the near future.

The ATO already has computer technology that is allowing them to compare deductions of taxpayers with the same job title and this software then allows them to select taxpayers who seem to be making excessive claims in comparison to others in the same field.

Incorrectly claiming or over-claiming could result in ATO penalties and/or interest so this tax season, if you are unsure of what can be legitimately claimed as a deduction in your income tax return, please contact our office to organise meeting with one of our accountants who will be able to help you.

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