Q & As of the month

Find out what your peers are asking – based on real-life questions submitted to TechConnect.

By Janet Manzanero-Caruana, Senior Technical Services Manager

Q: My clients are Age Pension age. They are selling their home which is in a lifestyle village. They have lived in the home for more than 10 years before the sale and are eligible for the main residence exemption. They have never made a downsizer contribution before.

Can they contribute the sale proceeds to superannuation as a downsizer contribution?

A: The clients may not be eligible to make downsizer contributions if the home in the lifestyle village is regarded as a mobile home. Proceeds of the sale of a mobile home are not eligible for the downsizer contribution.

Explanation:

The requirements to make a downsizer contribution is found in s292-102 of the Income Tax Assessment Act (ITAA) 1997 and explained in detail in LCR 2018/9: Housing affordability measures: contributing the proceeds of downsizing to superannuation.

The requirements in s292-102 are:

  • the person must be at least age 65 at the time of making the contribution
  • the person has not previously made a downsizer contribution, or had one made on their behalf, relating to a previous disposal of another home
  • the contribution must be made to a complying super fund within 90 days of the change of ownership or a period approved by the ATO Commissioner. Change of ownership usually occurs at settlement
  • the person or their spouse, or both, owned the home for a continuous 10-year period immediately before the disposal and lived in it as their main residence
  • any capital gain or loss from the disposal of the home qualifies for the main residence exemption in part or in full or, if the former home is a pre-CGT asset, it would have been eligible for the main residence exemption
  • the amount of the contribution is all, or a portion of, the sale proceeds of the sale of the person’s home (except a caravan, houseboat, or other mobile home) up to a limit of $300,000 per person
  • the downsizer form must be submitted to the superannuation fund trustee on or before the downsizer contribution is made.

Homes in lifestyle villages (also known as manufactured home parks) are generally demountable home units situated on leased land. While the client may be eligible for the capital gains tax main residence exemption in subdivision. 118-B of the ITAA 1997, section 292-102 excludes mobile homes from the definition of the term ‘dwelling.’ On the other hand where a retirement village unit is owned under a strata title or as shares with attached residence rights it is not excluded by section 292-102.

Homes in lifestyle villages may look and feel like retirement villages. It is important to confirm whether the client lives in one or the other as this can impact on their eligibility to make downsizer contributions.

By Scott Quinn, Senior Technical Services Manager

Q: My client has a rental property and is entitled to a part age pension. The client’s tenant recently moved out. The client is now allowing her adult son to live there rent free.

Will Centrelink consider my client to have deprived herself of income?

A: If your client is receiving an age pension through Centrelink, net rental income is assessed under the income test. This is gross rent less allowable tax deductions for that property with a few exceptions. The following deductions are allowable for tax purposes but not by Centrelink:

  • capital depreciation
  • special building write off
  • constructions costs
  • borrowing costs eg loan establishment fees but not the interest expense.

If net rental income is negative, then net rental income is taken to be nil.

As your client is not receiving rent, her net rental income assessed under the income test is nil.

Deprivation of income does not apply. Not deriving income from an asset is not considered disposal of income by Centrelink. Please see the Guide to Social Security Law – General Provisions of Deprivation.

What if rent free accommodation was provided to a close friend rather than her son?

The Centrelink assessment will not change if accommodation was provided rent free to a close friend rather her son.

However, if your client was receiving a Department of Veteran's Affairs (DVA) means tested pension, rent free accommodation provided to someone other than a family member is assessed as deprived income. Deprived income is counted as ordinary income under the income test and the allowable gifting thresholds do not apply.  Please see section headed ‘Disposal of rental income’ on DVA’s CLIK website. Special rules may apply if the client was entering residential aged care.

Be careful assuming that the same assessment is applied by both Centrelink and DVA.

By William Truong, Technical Services Manager

Q: My client is age 63 and ceased a gainful employment arrangement on 14 August 2018. She was over age 60 at the time of ceasing employment.

Since then my client has worked eight hours per week and does not intend to work 10 hours or more per week in the future.

As she met a condition of release at the time in 2018, can she now commence an account-based pension with her super now?

A: She can choose to commence an account-based pension or leave the funds in super to access at another time. The client has ceased her employment arrangement after age 60 which is a condition of release. She should contact her super fund as soon as possible to unrestrict her super balance.

As the client ceased her Job on 14 August 2018 (after turning age 60) when the super balance was $400,000 the balance will be to unrestricted up to $400,000.  Any further personal contributions made into the fund or earnings made after 14 August 2018 will form part of the preserved components. To access these preserved amounts, she  will need to meet a new condition of release. As this client has no intention of returning to work for 10 hours or more each week, has attained preservation age and ceased a gainful employment arrangement she may also access contributions and earnings accrued after 14 August 2018.

More information

If you have any questions, or would like more information, please contact the IOOF TechConnect team on 1300 650 414.

Disclaimer
The information in this section of the website is intended for financial advisers only and is not to be distributed to clients. It has been prepared on behalf of Australian Executor Trustees Limited ABN 84 007 869 794 AFSL 240023, IOOF Investment Management Limited ABN 53 006 695 021 AFSL 230524, IOOF Investment Services Ltd ABN 80 007 350 405, AFSL 230703 and IOOF Ltd ABN 21 087 649 625 AFSL 230522 based on information that is believed to be accurate and reliable at the time of publication.