Gifting money to children is complex but it can be done, writes George Cochrane.
Can children under 18 put their inheritance, work earnings etc into fully franked shares? Can these shares be in their name? If the money was held in trust, what happens when they are ready to use the money? Do the parents have to sell the amount in the trust, incurring another set of problems? V.B.
Whether you gift income directly to children under 18 or distribute money via a discretionary family trust, they are subject to a tax rate of 66 per cent on unearned income between $417 and $1307 and 46.5 per cent on additional income. Children under 18 can no longer claim the low-income tax offset or LITO on unearned income.
Note that money earned, say, from a newspaper round or received from a deceased estate is taxed as adult income so the first $6000 is tax-free. They can then also claim the LITO so, in effect, the first $16,000 is tax-free, as of 2011-12.
If money is placed in trust for the children by the parents, it is only exempt from the minor's tax if the minor will eventually receive the trust capital and if it stems from, among other sources, lottery winnings or court-awarded or "out of court" compensation, superannuation proceeds, a will or child support after a family breakdown.
One plan, therefore, is to win the lottery and place the money in a trust in your child's name, which I am sure would guarantee a happy new year. The catch is, the money must eventually go to the child.
Salary sacrifice is key
I am 62 years old and will work full-time until I'm 65. My wife is also 62 but not working. I have super of $357,040 and my wife's super is $49,890. I have already started an allocated pension and am receiving the minimum pension. I am working with Thiess and they are offering super with another super fund but I am going to lose money by rolling over all my money to them. I have been with IOOF since 2006. Do you think I can lock my money in a cash account so my total value of super does not go down due to share movement? Is it necessary to limit my total super to $500,000 or lose some benefits within the next three years? Should I transfer some money from my account to my wife's account? Is it advisable to make her account also an allocated pension? S.S.
Yes, you can switch to cash as a means of trying to avoid a market crash. For what it's worth, I think there is a strong possibility of a downturn after December. By "losing money", I presume you will have to pay capital gains tax on any gains on your current fund before rolling over. You cannot be forced to roll over to a new fund.
The government proposed retaining a higher concessional contributions cap for those people with less than $500,000 but that would mean introducing a system similar to the old reasonable benefits limits system, with its monstrous problems of what to measure and how. Nothing has so far been announced and, hopefully, never will.
While you are working, and until you retire or turn 65, your super benefits are preserved and cannot be withdrawn and gifted to your wife for her to add to your super. You can, if you wish, split any concessional contributions, i.e. roll over after-tax employer, plus any salary-sacrificed, contributions, into your wife's super fund but I can't see any point in this unless you want to claim a higher age pension until she also reaches her pension age of 65.
Any pension taken from your wife's account would be so small as to be irrelevant to your living standards and I suggest leaving her fund to accumulate. You need to save a lot more before you retire, so keep salary sacrificing as much as you can.
Hang on to the family unit
I own a home unit in partnership with my sister. We acquired it in 1993 and vacated it 10 years later, renting it out in the interim. Renovations were initially done and the capital gain since 1993 would be more than double the initial cost. Would considerations such as total rates, body corporate fees etc be viable? Should we sell? Also, should my sister buy my share and would this affect transactions such as capital gains tax? R.A.
Rates and body corporate fees would have been deductible annually against rental income. But any capital expenses that were not deductible can be added to the cost base of your property.
If your sister buys your share, you are subject to capital gains tax on your 50 per cent for the period that it was not your principal residence, calculated as a proportion of the time you owned it. Your sister is not liable to CGT until she sells.
I think a well-maintained, fully paid off unit in a seaside Sydney suburb is probably going to hold its value compared with other suburbs so I would suggest holding on to it. As rents rise, it is likely that rental yields will begin to challenge term deposits as a means of maximising your investment income.
If you have a question, send it to Personal Investment, PO Box 3001, Tamarama, NSW, 2026. Help lines: Banking Ombudsman, 1300 780 808 pensions, 13 23 00.
Frequently Asked Questions about this Article…
Can children under 18 hold shares and how are dividends and other unearned income taxed?
Children under 18 who receive unearned income (for example dividends from shares) are generally taxed under the minors’ tax rules. According to the article, unearned income between $417 and $1,307 is taxed at 66%, and amounts above that are taxed at 46.5%. Also, minors can no longer claim the low-income tax offset (LITO) on unearned income.
What's the difference between 'earned' and 'unearned' income for minors and how much is tax‑free?
Earned income (for example money from a newspaper round or inherited estate money treated as earned) is taxed as adult income: the first $6,000 is tax‑free and the child can claim the low‑income tax offset. The article notes that, as of 2011–12, that combination can make about the first $16,000 effectively tax‑free. Unearned income (like investment income) is taxed under the harsher minors’ tax rates described above.
If parents put money into a trust for their child, is that money exempt from minors’ tax?
Not automatically. The article explains a trust will be exempt from the minors’ tax only if the minor will eventually receive the trust capital and the funds come from certain specified sources (examples given include lottery winnings, court‑awarded or out‑of‑court compensation, superannuation proceeds, a will, or child support after family breakdown). The money must ultimately go to the child for the exemption to apply.
What happens to money held in a trust when a child is ready to use it?
When a minor eventually receives trust capital, the trust can meet the conditions to be exempt from minors’ tax (provided the funds originally meet the specified source rules). The article emphasises that the money must ultimately be passed to the child — that is the key condition for exemption — so distributions of capital to the child are the mechanism by which the trust meets those rules.
I'm 62, still working and have an allocated pension—can I switch to cash to avoid a market crash or be forced to roll into my employer's fund?
Yes, you can switch your super investments to cash within your current fund as a way of reducing market exposure. The article also says you cannot be forced to roll your preserved benefits into a new employer fund. Be aware the act of rolling over may crystallise capital gains tax on any gains in your current fund.
Can I transfer preserved super to my non‑working spouse or start an allocated pension for her to improve our retirement position?
While you are working (and until you retire or turn 65) preserved super benefits generally cannot be withdrawn and gifted to your spouse. You can split concessional contributions into your spouse’s super, but the article notes there’s little point unless you’re seeking a specific age‑pension outcome (for example to claim a higher pension until she reaches pension age). For a small spouse balance, starting a pension may be irrelevant — the article suggests leaving a small account to accumulate and continuing to salary‑sacrifice where possible.
If my sister buys my 50% share of a rental unit, how will capital gains tax and deductions be affected?
If your sister buys your share, you would be liable for capital gains tax on your 50% interest for the portion of ownership during which it was not your principal residence — CGT is calculated proportionally by time. Your sister wouldn’t face CGT on that interest until she later sells. The article also reminds that rates and body corporate fees for a rented property were deductible annually against rental income, and capital (non‑deductible) expenses can be added to the property’s cost base.
Should I sell or hold a well‑maintained, fully paid unit in a seaside Sydney suburb?
The article’s view is to hold. A well‑maintained, fully paid unit in a desirable seaside suburb is likely to hold value relative to other areas. As rents rise, rental yields may become more attractive and could rival term‑deposit returns, so holding the property to benefit from rental income growth is recommended in the piece.
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