Downsizer contributions can be time critical

With the expansion of the downsizer contribution, the timing of when it is used can affect how to use non-concessional contributions.

.

Tim Miller, education and technical manager for Smarter SMSF, said with the age requirement of the downsizer contribution dropping to 55 years and enhancing the non-concessional contribution age to 75, deciding when to use the strategy is important.

“In reality, it means in that 20 to 25-year window, there’s the potential to live in two houses for 10 years,” he said.

“While the NCC is subject to age tests, and ultimately total super balance test, downsizer contribution is only a future-based contribution and it could be a good strategy to use, but first you have to decide on the benefit attached to it, whether is right to use it now or is it better off using NCC because we are potentially going to downsize at least one more time in our life and that's going to be circumstantial for your clients as to whether they're likely to go down that path.”

Aaron Dunn, CEO of Smarter SMSF, said a client may be downsizing a property but not necessarily downgrading and may need that same level of cash to facilitate the new property purchase.

“However, this strategy provides an opportunity, in particular where that individual has access to the superannuation monies, where they could be drawing down numbers and pricing that with an identical amount of money, being a downsizer contribution, and in essence, take money from what was arguably a taxable component into actual tax-free component,” he said.

“That sort of strategy is still valid in that context. The other thing that is worth noting, and we've only really seen this highlighted in the last couple of years, is that the contribution itself does not have to come from the proceeds of the sale.”

Dunn said this means that the member can contribute as long as it's linked to the disposal of that qualifying asset for the main resident exemption.

However, it’s important to recognise that the size of the contribution cannot exceed the proceeds from the sale and is capped at $300,000 each.

“For example, the individual might have some listed shares and they can do a related party acquisition of those which would enable them to then action for that amount to qualify as a downsizer contribution. The same application would apply for the qualifying spouse as well.”

He added that understanding some of the nuances in how the legislation is drafted and how it might apply regarding the downsizing contribution works based upon the monies the fund has available.

Miller said contributions are the major impact item to total super balance and are very much timing-based regarding pensions and this becomes critical from a planning point of view.

“If you get one or two contributions wrong, it can throw you out for two or three years,” he said.

“If a client is going to downsize to utilize in-specie contributions you have to make sure it's an asset that is acceptable and allowable under the acquisition of asset rules, but also, you need to understand that with the onset of non-arm's length income rules, in-specie contributions cannot be an afterthought.”

He added these strategies need to be documented promptly to avoid any NALI consequences, much of which is linked to TR2010/1, which is still going through the draft process around in-specie contributions.

 

 

 

Keeli Cambourne
May 27 2024
smsfadviser.com

 

More Articles

TRANSITIONING INTO RETIREMENT: WHAT YOU SHOULD KNOW

Deciding on your retirement funding options comes down to personal choice. . If you’re close to...

Read full article

The Deadliest pandemics in History

Check out the Deadliest pandemics in...

Read full article

Middle-to-higher incomes boosting SMSF growth

The SMSF sector experienced healthy growth over the March quarter, with men and women on middle-to-higher...

Read full article

The superannuation changes from 1 July

The super changes on the way from the start of the 2024-25 financial year. . A number of...

Read full article

Investment and economic outlook, May 2024

Region-by-region economic outlook and latest forecasts for investment returns. . For the last...

Read full article

Downsizer contributions can be time critical

With the expansion of the downsizer contribution, the timing of when it is used can affect how to use...

Read full article

Deeming freeze a win for Age Pensioners

Why the decision to keep deeming rates on hold may be a window for interest rates.   . In...

Read full article

Plan now to take advantage of stage 3 tax cuts

With the stage three tax cuts set to be implemented in around six weeks, opportunities for tax-saving...

Read full article

Sofie Korac is an Authorised Representative (No. 400164) of Prudentia Financial Planning Pty Ltd, AFSL 544118 and a member of the Association of Financial Advisers.

Financial Advice Sydney and the North Shore Office based in Gordon NSW

Financial Services Guide - Disclaimer & Privacy Policy

^