Downsizer Contributions – understanding the CGT main residence exemption
Changes to the eligibility age for downsizer contributions from 1 July 2022, means that persons aged from 60 can now make eligible downsizer contributions – and the age eligibility is tipped to drop further (to 55years).
The premise behind downsizer contributions was to reduce pressure on housing affordability. Prior to the introduction of the measure contribution restrictions and caps prevented some older Australians from making contributions to superannuation from the proceeds of downsizing their homes that no longer met their needs. The measure provided an avenue to contribute those proceeds into superannuation and it appears to have been well utilised by many older Australians.
Amongst the eligibility criteria for downsizer is the requirement for the proceeds from the sale of the qualifying home to be either fully or partially exempt from income tax under the CGT main residence exemption or would have been entitled to either a full or partial exemption where the qualifying home is a pre-CGT asset. Given only a partial CGT exemption is required, there will be scenarios where an individual will qualify for making a contribution under the downsizer measure even though the property they have sold is not the home that they were actually living in at the time.
Below is an example (based on an ATO example) of a property, which the individual does not live in at the time of sale, but still qualifies for a partial CGT main residence exemption:
- bought a house in Brisbane on 15 September 2011 and moved in immediately.
- moved to Perth on 10 October 2014 and rented out his Brisbane house.
- bought and moved into a new house in Perth on 3 October 2019.
- sold the house in Brisbane on 1 March 2022.
When he completed his 2021–22 tax return, James decided to treat the Brisbane house as his main residence for the period after he moved out in October 2014 until he purchased his new main residence in Perth in October 2019. This is a period of less than 6 years. This means James is entitled to claim a partial main residence exemption under the ‘six-year rule’.
As James decided not to treat the Brisbane house as his main residence after he bought the Perth house, he is subject to CGT for that period. This means James must include a capital gain or loss in the period not covered by the main residence exemption in his 2022 tax return (from October 2019 until March 2022).
Because the property does qualify for a partial CGT main residence exemption, and James has owned the property for more than 10 years, it is a qualifying home for the purposes of Downsizer contributions. James would also need to meet the other requirements, such as being at least 60 years when making the contribution, ensuring the contribution is made within 90 days of settlement, and that a valid notice is provided to the super fund at the time of making the contribution.
If you have any questions about downsizer contributions, please contact our Super team on 3286 1322.