Nick Bruining Q+A: The boxes that need to be ticked to make a super downsizer contribution

Question

My wife and I are both retired and looking to downsize. In March 2012, we purchased a house and land package. Due to building delays and other issues, the house was not completed and settled until December 2015.

Which date is relevant in determining our eligibility to make a super downsizer contribution — the contract date or the possession date?

Is a downsizer contribution subject to contributions tax and when we die, would the benefit be subject to the 15 per cent “death tax”?

Answer

There are several boxes that need to be ticked to make a valid super downsizer contribution to your fund.

You must be aged over 55, the funds must be contributed within 90 days of settlement, the amount cannot exceed $300,000 per person, you can only make one downsizer contribution in a lifetime and you must have owned the property for 10 years or more.

For tax purposes, the effective date is the date you signed the contract, not the date of settlement, so you will be eligible to make a downsizer contribution.

Downsizer contributions are treated differently to other contributions.

As a starting point, there is no requirement to satisfy a work test. Provided you are aged over 55 you can contribute at any age.

It does not count towards any contribution caps, so if you are eligible you could make a super downsizer contribution and, at the same time, make another contribution under the normal contribution rules.

For tax purposes, the downsizer contribution is treated as a non-concessional contribution meaning no contributions tax applies. Only concessional contributions, where someone claims a tax deduction for the contribution are subject to contributions tax.

If you obtain a statement from your super fund which includes the death benefit components, you will see that your total fund balance is apportioned between tax-free and taxable amounts. The tax-free part includes previous non-concessional contributions, government co-contribution payments and super downsizer contributions.

The taxable portion includes the concessional contributions and any investment earnings of the fund. Only the taxable portion is subject to the so-called “death tax”. At death, and if the benefit is payable to a financial dependent or financial interdependent, no tax is payable on any amount.

In your case, only your wife probably satisfies this requirement. Dependents, such as your adult children are unlikely to be financially dependent and may be liable for tax.

In any event, no tax is payable on the tax-free part including the anticipated super downsizer contribution.

The taxable portion, however, incurs a 15 per cent tax. If paid directly to an individual, the 2 per cent Medicare levy may also be payable. If you nominate your estate as the beneficiary, the Medicare levy could be avoided.

Got a question for Nick? Email yourmoney@thewest.com.au or write to us at Your Money, GPO Box D162, Perth WA, 6840.

Nick Bruining is an independent financial adviser.