Question of the month

Downsizer contribution: Sale of investment property that was a former home

Article published on: 17-08-2023

My clients (both currently over age 55) purchased a property 12 years ago and lived in it for nine years. They then rented the property for three years and have just sold it. For capital gains tax (CGT) purposes my clients are deemed to have acquired their property when they first rented it three years ago. Can they make a downsizer contribution?

Answer

If the clients elect for the first property to be their main residence during the time they lived in it and they meet all the other requirements, they will be eligible to make downsizer contributions. Individuals are eligible to make a downsizer contribution if they satisfy all of the following:

They dispose of a qualifying dwelling.
The dwelling was owned by the individual, their spouse or former spouse at all times during the 10 years before disposal.
The capital gain or loss from the sale are partially or wholly exempt under Subd. 118-B of the Income Tax Assessment Act 1997 (ITAA97), which deals with the CGT main residence exemption. If the dwelling was a pre-CGT asset, it would have qualified if it was a CGT asset. If the dwelling is solely owned by an individual’s spouse, the individual would qualify for a full or part main residence exemption if the individual owned the dwelling (had lived in there).
The contribution is made within 90 days of receiving the proceeds of sale (usually at settlement). An application can be made to the ATO to have this timeframe extended.
They provide the super fund with the approved Downsizer contribution into super form.
They have not previously made downsizer contributions in relation to an earlier disposal.

An individual’s downsizer contributions cannot exceed the capital proceeds received and is limited to a maximum of $300,000.

The issue

The issue in the example is whether the 10 year ownership prior to disposal is met because s118-192 of ITAA97 deems the property to be acquired when it was first rented, which was three years ago. In addition, can the main residence exemption apply to disregard any capital gain or loss because the ownership period prior to renting the property is disregarded?

Explanation

Section 292.102 of ITAA97, which contains the requirements to make downsizer contributions, doesn’t specifically disregard any period of ownership. Therefore, as the clients owned the property for 12 years prior to its sale, they meet the minimum 10 year ownership requirement.

Section 118.192 specifically deems the clients to have acquired the property at market value when they first rented it out (three years ago) for CGT purposes. This means any capital gain or loss relating to the period before the property was first rented out (the first nine years of ownership) is effectively disregarded for CGT purposes. As section118.192 is part of Subd. 118-B of the ITAA97 and it disregards any capital gain or loss, the requirement for the CGT main residence exemption to apply is fully or partially met for downsizer contribution purposes.

This communication is prepared by Actuate Alliance Services Pty (ABN 40 083 233 925, AFSL 240959), a related entity of MLC Wealth Limited (ABN 97 071 514 264). This is for financial adviser use only – it is not to be distributed to clients. The communication has been prepared to provide financial advisers with technical resources, support and knowledge. The information in this document is current as at the date of publication and reflects our understanding of existing legislation, proposed legislation, rulings etc as at the date of issue, and may subject to change. In some cases, the information has been provided to us by third parties. Whilst care has been taken in preparing this document, no liability is accepted for any errors or omissions in this document, and loss or liability arising from any reliance on this document. Any general tax information provided in this publication is intended as a guide only and is based on our general understanding of taxation laws. It is not intended to be a substitute for specialised taxation advice or an assessment of your liabilities, obligations or claim entitlements that arise, or could arise, under taxation law, and we therefore recommend your client consult with a registered tax agent.