The proposed changes, contained in the Treasury Laws Amendment (Measures for a Later Sitting) Bill 2019, aim to clarify a number of technical issues relating to the way the CGT rules interact with the downsizer provisions.
The first change establishes that an individual will be eligible to contribute the sale proceeds from a property that was held by their spouse, purchased prior to the introduction of CGT in September 1985 and was the spouse’s main residence. The downsizer rules currently only cover a pre-CGT main residence that is owned by the individual but not that of their spouse.
The second measure ensures that an individual whose spouse has previously made a downsizer contribution in respect of another property is not disadvantaged by this, as the law currently states that spouses can only make contributions “up to the lesser of $300,000 and the amount of capital proceeds that they or their spouse received from the disposal of their property”.
This change confirms that in cases where an individual’s spouse has previously made a contribution up to the maximum cap of $300,000 from the sale of another property where the proceeds are worth less than $600,000, their spouse who is disposing of a separate property will not have their cap reduced below $300,000 or the maximum of the capital proceeds they receive from the property disposal.
These first two measures apply in relation to a disposal of an ownership interest in a dwelling if the contract for the disposal is entered into on or after 1 July 2018.
CGT and capital proceeds
Thirdly, another amendment will ensure individuals can only contribute the actual proceeds they receive from the sale of their home, rather than increasing that amount by any deemed capital proceeds as a result of applying the CGT market value substitution rule.
Currently, the CGT market value substitution rule deems a taxpayer transferring a property to their spouse for nil consideration to receive the full market value of the capital proceeds.
This rule will no longer apply in relation to increasing the capital proceeds for downsizer contribution purposes if the contract for the disposal is entered into on or after the day the amendments receive royal assent.
DBA Lawyers director Daniel Butler told sister title SMSF Adviser that the final proposed change was particularly significant, given that existing tax law would indicate individuals should be able to use capital proceeds from the disposal of an interest in a dwelling as part of their contribution.
“The ATO has, however, said that that’s not the intent of the legislation, but it’s in the tax law that the uplift applies,” Mr Butler said.
“It’s somewhat common between spouses where they want to share the house but perhaps one person goes into business and may want to transfer their interest in the house to their spouse who is not at risk.
“When they do that, they may not have any consideration, so that’s where market value applies, and that is where the commissioner may have concerns in relation to downsizer contributions.”
The ATO’s law companion ruling 2018/9 states in relation to downsizing, “where an individual disposes of their ownership interest in a dwelling to a related party on a non-arm’s length basis for less than market value, and the individual or their spouse make downsizer contributions the total value of which exceeds the amount of the sale price specified in the contract, the commissioner will consider whether Part IVA of the Income Tax Assessment Act 1936 applies to the arrangement”.
Mr Butler added that the new clarifications were likely due to the fact that downsizer contributions were already rapidly growing in popularity among SMSF members despite only being available for just over a year.
“It’s relatively new, but it’s interesting that [Assistant Treasurer] Michael Sukkar said there’s been $1 billion into super because of this downsizing measure, so it seems to have some traction in the market — that’s quite a lot of money in a short space of time,” he said.