Many advisers not ready for the downsizer contribution

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The downsizer contribution is set to allow those over age 65 to contribute the sale proceeds of their home to super. The start date of 1 July, 2018 is approaching fast, but many advisers are not across the traps of a strategy that could provide significant value to their clients.

wealthdigital’s Technical Manager, Rob Lavery, has concerns about the industry’s familiarity with the rules, “it sounds like a straightforward opportunity, but there are plenty of places advisers can come unstuck.”

“There are some clients, who seem like prime candidates to benefit from the strategy, who may not qualify,” said Lavery. “Issues around how long the client has owned the property, how the sale is to be executed and the amount of the sale proceeds all need to be considered.”

“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 downsizer contribution if the home would have been considered their main residence under CGT law.”

While Lavery cites eligibility as a concern, he also sees other factors advisers may not have considered. “Clients may find that their downsizer contribution has unexpected consequences. Centrelink meanstesting may be impacted by the change in the client’s assets. This is particularly important where the client is holding funds to purchase a new home.”

“Changes that took effect on 1 July, 2017 will also influence the benefit a client can gain from making a downsizer contribution. The client’s transfer account balance will need to be considered. 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.”

“The client’s total superannuation balance also has flow on affects. Clients with higher total superannuation balances may lose access to a number of benefits and opportunities in the super system. Those with SMSFs will need to be particularly careful.”

Lavery also warns that not all the rules that will govern the downsizer contribution are yet clear. “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. There may yet be more devil in the detail.”

Lavery concluded, “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.”

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