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Advisers must master downsizing measure

A woman looks at a blackboard.

Advisers need to be across the downsizing contribution rules for their clients.

While the federal government’s downsizing measure may only apply to a minority of clients, advisers should still be across the technical aspects in order to determine its appropriateness, as well as being able to execute the contributions correctly, an industry lawyer has said.

This year’s federal budget contained a measure aimed at encouraging older Australians to free up housing stock by enabling those over the age of 65 who were downsizing their home to make non-concessional contributions of up to $300,000 into their super fund from the proceeds of the sale of their principal home.

“It’s a change on its way and it’s an interesting little area of law, so for most it may not be beneficial but there could be a minority for whom it’s beneficial for, so you need to understand whether your clients are entitled to it in the first place, and secondly, whether it’s beneficial for them to exercise the entitlement,” Townsends Lawyers superannuation special counsel Michael Hallinan told the Super Central Bacon, Super and Eggs seminar in Sydney yesterday.

“For Centrelink clients, downsizer contributions effectively transfer $600,000 of value [for a couple] from assets-test-exempt status – when embedded in the principal place of residence – to assets-tested status, so they will not thank you for materially reducing their pensions or terminating their entitlement to the age pension or pensioner card.

“So are there any clients for whom this should be considered?

“They may be a minority, but there may be some for whom it’s going to be beneficial and they will be non-Centrelink clients who have low super balances but have high wealth embedded in their principal place of residence, and presumably they have to be excluded from the age pension for some reason and have assets outside of super and outside of the family home.”

Hallinan explained in this case, there could be some benefit for downsizer contributions as the money going into the super fund will be below the transfer balance cap and there is no adverse impact on the assets test as they are not receiving Centrelink benefits.

“However, for non-Centrelink clients who have no transfer balance cap space, it’s a choice between holding money in the super environment taxed at 15 per cent or $600,000 outside of super and holding it personally, maybe in a discretionary trust,” he noted.

“So you need to know the technical details for this entitlement and also whether your clients are suitable for this type of contribution.

“The legislation is proposed to commence from 1 July 2018 as the exposure draft submissions period has now ceased, with Treasury due to introduce the final version of the legislation later this year with a view to pass it either later this year or early next year.”

He also warned there were some quirks in the original drafting of the downsizing measure, which he will be analysing in an upcoming paper.

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