Downsizer super and non-arms length sales

ATO : It is not intended that eligible spouse individuals will be eligible to make downsizer contributions where they have entered into a non-arm’s length transaction to dispose of their ownership interest in the dwelling for less than market value and then applied CGT market value substitution rules to be taken to have received the market value of the ownership interest.

WARNING : This could see the downsizer contribution lost

Example : David owns his home and he and his spouse Mary have met the eligibility test. They contemplate selling their home. Their son suggests he buy it. David and Mary dont seek tax advice and follow their friends suggestion and this was agreed by the conveyancer and broker to transfer the title for $1. They understand market value substitution applies for CGT and see no issue with the duty and downsizer issue. They know duty will be assessed at market value.

This fails the downsizer rules and the consideration is the sole element of the capital proceeds received. The downsizer contribution will be limited to $1

Example 2 : Susan owns a home and with her spouse Peter they decide that Peter will buy 50% of Mary's home so that a downsizer contribution can be made. This is subject to Nil Victorian duty as the consideration is $0 for love & affection.

This fails the downsizer rules as the consideration is $0.

They should have obtained tax and legal advice prior to acting. The ATO caution that a non-arms length arrangement may give rise to a Part IVA issue as the tax benefits of a higher super balance are a tax benefit.

https://www.ato.gov.au/law/view/pdf/pbr/lcr2018-009.pdf
https://www.ato.gov.au/law/view/pdf/gdn/gdn2018-002.pdf

 

ATO: 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 (Part IVA) applies to the arrangement.

Therefore, per LCR2018/19 it is the intent of the legislation that the contribution be the lesser of $300,000 or the sale price specified in the contract. Note that SPRGN 2018/2 makes no reference to 'sale price specified in the contract', only capital proceeds.

Example 1: Christopher and Christine sell their 1.5M home to their son Christos for $600k. Yes the market value substitution rules will apply, however CGT is not applicable as it is their main residence and they are happy to pay stamp duty on the full market value.

Both Christopher and Christine are able to contribute up to $300k as a downsizer contribution, as this is the total sale price specified on the contract.


Its interesting that they make this clarification on the intent of the law in para 62 of LCR2018/9, given that they have stated that capital proceeds are defined in the ITAA1997 and this states;

The capital proceeds from a *CGT event are the total of:

(a) the money you have received, or are entitled to receive, in respect of the event happening; and

(b) the *market value of any other property you have received, or are entitled to receive, in respect of the event happening (worked out as at the time of the event).


I would be keen to see how they determine a tax benefit under Part IVA given that there would be no impact on the taxable income of the individual/s selling the property given that the market value substitution rules apply. If the contribution was going into the superannuation fund, then the benefit to the fund is an increase in balance, it is neither a reduction in taxable income or and increase in allowable deductions, which is the requirement for a 'tax benefit' under PartIVA.

 

Part IVA is less likely than assessing the downsizer contribution as ineligible. The ATO are more likely to use IVA as a secondary issue than primary. They can form a decision to assess both with the taxpayer in the position to object and appeal.

A tax benefit need not be direct and personal. A tax benefit can arise through the contribution, super pension etc. The ATO could cancel the super pension