Gifting money to children is complex but it can be done.
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 keyI 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 unitI 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 buy and hold fully franked shares in their own name?
Yes, children can technically hold shares in their own name, but there are important tax consequences. Unearned income held in a child's name (for example dividends) is subject to the minor’s tax rules discussed in the article, which can mean very high tax rates on investment income. Because of those rules many families use trusts or other structures — but trusts have their own conditions and tax implications (see trust-related FAQ).
How is unearned income taxed for children under 18 in Australia?
According to the article, children under 18 who receive unearned income are subject to the minor’s tax rules: a 66% tax rate on unearned income between $417 and $1,307 and 46.5% on additional unearned income. Also, children under 18 can no longer claim the low‑income tax offset (LITO) on unearned income.
Is income a child earns from work or an inheritance taxed differently from other unearned income?
Yes. Money a child actually earns (for example from a paper round) or money received from a deceased estate is taxed as adult income. That means the first $6,000 is tax‑free and the child can claim the LITO — so, as noted in the article (for 2011–12), the first roughly $16,000 can be effectively tax‑free.
If parents put money into a trust for their child, when is that money exempt from the minor’s tax rules?
A trust for a minor is only exempt from the minor’s tax rules if the child will eventually receive the trust capital and the funds originate from qualifying sources. The article lists acceptable sources such as lottery winnings, court‑awarded or out‑of‑court compensation, superannuation proceeds, money from a will, or child support after family breakdown. If those conditions aren’t met, the minor’s tax rules can still apply.
Can I switch my superannuation to cash to avoid a market downturn and do I have to move my whole balance to a new employer fund?
Yes, you can switch investments within your super to cash as a way to reduce market risk. You cannot be forced to roll over your entire balance into a new employer fund. Bear in mind the article points out that rolling balances or changing funds can trigger capital gains tax on any realised gains in your current fund, so check tax consequences before moving money.
Should I split concessional contributions with my non‑working spouse or transfer part of my super to her to improve our pension position?
While you can split concessional contributions (employer and salary‑sacrifice contributions) to your spouse’s super, the article suggests there’s little point unless you need to boost your combined age pension entitlements before your spouse reaches pension age. Super benefits are preserved while you’re still working and until you reach retirement age, so you can’t simply withdraw and gift them to your spouse.
Are rates and body corporate fees for a rented unit tax deductible, and can renovation costs affect my capital gains tax (CGT)?
Yes — rates and body corporate fees paid while the property was rented would have been deductible against rental income each year. Capital expenses that weren’t deductible can generally be added to the property’s cost base, reducing future CGT when you sell.
If my sister wants to buy my share of a jointly owned unit, how will capital gains tax apply and is it better to hold or sell?
If your sister buys your share, you will be liable for capital gains tax on your 50% share for the period the property was not your principal place of residence; the CGT is calculated proportionally to the time you owned it. Your sister won’t face CGT until she later sells. The article’s view is that a well‑maintained, fully paid unit in a seaside Sydney suburb is likely to hold its value, so holding may be a reasonable option, especially as rising rents could improve returns. Ultimately the decision should weigh ongoing costs, rental prospects and your financial needs.
Call 1300 880 160
Start a chat
Schedule a call
