Many advisers are not across the traps of strategies using the downsizer contribution measure, with SMSFs needing to be particularly careful, a specialist software provider has warned.
While the downsizer contribution could provide significant value to clients, wealthdigital technical manager Rob Lavery has concerns about the industry’s familiarity with the rules and eligibility.
“It sounds like a straightforward opportunity, but there are plenty of places advisers can come unstuck,” Lavery said.
“There are some clients, who seem like prime candidates to benefit from the strategy, who may not qualify.
“There are also clients who may be able to use the downsizer contribution when it doesn’t seem obvious – if the client does not own their home themselves but their spouse does, they may be able to use the contribution if the home would have been considered their main residence under capital gains tax law.”
Other factors he believes advisers have not considered are around unexpected consequences.
“Centrelink means-testing may be impacted by the change in the client’s assets,” he noted.
“This is particularly important where the client is holding funds to purchase a new home.
“The client’s transfer account balance will also need to be considered, so if their balance is approaching their transfer balance cap, they will be restricted in how much of their downsizer contribution can be used to start an income stream.”
Further, the client’s total super balance also has flow-on effects, he said.
“Clients with higher total super balances may lose access to a number of benefits and opportunities in the super system,” he noted.
“Those with SMSFs need to be particularly careful.”
He also warned not all the rules for the downsizer contributions were clear yet.
“The changes to the regulations that will allow older clients to contribute to super, without such requirements as meeting a work test, are yet to be made,” he said.
“There may be more devil in the detail.
“Ultimately, advisers will be best served to familiarise themselves with the rules around the downsizer contribution well before the start of the new financial year.”
Wealthdigital is the online business of knowITdigital.