The extension period for non-concessional contributions (NCC) means anyone making a downsizer contribution that is disallowed may find it trapped as an excess contribution or bring-forward contribution, according to Heffron managing director Meg Heffron.
“In the past, a person making a downsizer contribution would only have been making these things very late in life,” Heffron told attendees at the SMSF Association National Conference 2022 in Adelaide today.
“Maybe they have made it to 70 and if they have retired, a NCC at that point in time can’t be accepted.
“If they made the contribution thinking it’s a downsizer and it turns out it was not, it would be shoved out of the fund just like any other NCC, and that would be fine because at 70, if you are not working, you can’t make NCCs and the fund can’t accept it.
“Now, though, for the whole period up to 75 NCCs are perfectly legal and we can’t follow that rejected rule. Instead, we’ve accepted a perfectly legal contribution and now we have an excess or triggered a bring forward at the wrong time.”
She noted downsizer contributions can be up to $300,000 and being incorrectly trapped in an SMSF can have negative consequences.
“Imagine somebody who has a non-concessional cap of zero and now they an excess NCC of $300,000 with an associated earnings amount,” she said.
“In the past, the danger zone where that could happen was probably about 65 to 67 years of age; now it’s much, much longer and is from 60 all the way up to 75.
“We need to make sure we totally understand the rules and ensuring if we need the contribution to be a downsizer, and if the total super balance is too big for an NCC or if we don’t want to trigger a bring forward.
“If we need it to be a downsizer, we need to make sure we understand the rules for a much longer period of time because we have a much longer danger zone.”
