by Alicia Thomson

We previously published an article on downsizer contributions in May this year and referred to the potential to utilise the rules with a non-cash “sale” to a related party.

The government has since updated the ruling regarding the downsizer contributions. On the 22^nd of June 2020 the Treasury Laws Amendment (2019 Measures No. 3) Bill received royal assent. Section 292-102(3A) of the new legislation now prevents the use of the market value substitution rule to the extent that it increases the capital proceeds on the sale of property for the purpose of the downsizer provisions.

Market value substitution rule

(3A)    In working out capital proceeds for the purposes of paragraph (1)(b) or
(3)(b), disregard section 116‑30 to the extent that it has the effect of increasing those capital proceeds

For those members that had previously used the market value substitution rule, they could be subject to adjustments and penalties by the ATO under Income Tax Assessment Act 1936 (Part IVA).

Part IVA applies to a scheme if a tax benefit has been obtained in connection with the scheme and the main purpose of a person who participated in the scheme, or a part of it, was to enable a taxpayer to obtain that tax benefit.

The ATO has ruled out the possibility of an individual being eligible to make a downsizer contribution by entering into a non-arm’s length arrangement to dispose of their ownership interest in the dwelling and applying the CGT market value substitution rule so as to be taken to have received the market value of the ownership interest.

For example, when a property has the title changed from the husband to the wife. The event itself creates a CGT event. However, no consideration has been received. Neither spouse can make a downsizer contribution based on this event.

For a downsizer contribution to be made, consideration needs to change hands for the value of the property. This can be either cash, securities or business real property. Members must remember to deal at arms-length with the other entity in connection with the sale of the property.

To be eligible for a downsizer contribution the members must satisfy all of the below:

• Are 65 years or older at the time of the downsizer contribution
• The contract sale date of the house is dated after 1 July 2018
• The house was owned by you or your spouse for 10 years or more prior to the sale.
• Your home is in Australia and is not a caravan, houseboat or other mobile home
• The proceeds are either fully or partially exempt from capital gains tax (CGT) under the main residence exemption, or would be entitled to the exemption
• You have provided your super fund with the downsizer into super form either before or at the time of making your downsizer contribution
• You make the contribution within 90 days of receiving the proceeds of sale.
• You have not previously made a downsizer contribution

For more information on downsizer contributions:

https://www.ato.gov.au/Individuals/Super/Growing-your-super/Adding-to-your-super/Downsizing-contributions-into-superannuation/