A minor matter

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.