Self Managed Super Funds (SMSF)

Some tax considerations when it comes to an inheritance

By Graeme Colley
Executive Manager, SMSF Technical and Private Wealth - SuperConcepts Sydney, Australia

Surprises of a financial nature can happen at any time, whether the occasion is happy or sad. A gift or inheritance from a friend or relative may be put to good use in many ways. It could be spent on something on the long list of ‘nice to haves’ or could be invested or a combination of both – the choice is endless.

If the decision is made to save or invest the gift or inheritance, there are many ways in which it can be done. It could be deposited to an interest-bearing savings account, term deposit, purchase shares or used to pay off the home mortgage if this is considered to be the better investment. Whether it is invested personally, jointly, via a family trust or company, or superannuation, there are many ways in which the investment can be made – each can have its own advantages.

If the investment is joint, it will mean each joint owner can share in any income equally, or in proportion to each owner’s contribution to the investment. If it’s via a company or trust, income can be distributed to shareholders or beneficiaries of the trust. If it’s a super fund, the amount contributed cannot be accessed until retirement or another condition of release has been met. The benefit of investing an inheritance into superannuation is that it can be tax deductible and the fund is taxed at a relatively low rate on the investment income.

With super, it’s possible to be entitled to a total standard tax-deductible cap of up to $25,000, depending on what other tax-deductible contributions have been made by a person’s employer. In addition, if the total amount a person has in super as at 30 June in the previous financial year is less than $500,000, it is possible the ‘bring forward rule’ may operate. This rule allows a greater tax-deductible amount to be claimed for amounts that have not been claimed between an individual’s tax-deductible cap, and the amount claimed as a tax deduction, since 1 July 2018.

Here’s a couple of short case studies to give an idea of how gifts and inheritances can be used to contribute towards super:

Case Study 1

Pat and Sally’s daughter, Bridget, is in Year 12 and intends to attend tertiary studies over the next few years. When she turned 18 in June this year, various family members gifted Bridget ASX-listed shares to her via off-market transfers.

Bridget works part-time and last financial year earned about $2,000. Her income
this financial year 2020/21, will probably be around $50,000, including dividends and imputation credits. Bridget is considering making super contributions of up to $25,000, which is the current annual cap for tax deductible contributions.

If Bridget makes super contributions and claims a tax deduction, she will not only get the advantage of reducing the amount of tax she pays, but will have the benefit of the fund’s investment earnings until she retires- which could be in 40 or more years’ time. Whilst it may not be necessary for the contributions to be made in cash because if Pat and Sally have an SMSF, Bridget may be able to transfer the shares to the super fund as an off-market transfer and their value will be treated as tax deductible.

Case Study 2

Mark and Emily who are both nearing retirement and are under 65 years of age. They have received an inheritance from a distant aunt as there are no other living relatives in the family. They have some superannuation but consider the boost from contributing the amount received to their super fund should provide them with a tax-advantaged income for many years.

They decide to use part of the inheritance so both can make a tax-deductible contribution to super up to their $25,000 cap. This would need to take into account contributions made by their employer. In addition, they have decided to make non-deductible contributions of $300,000 each by accessing the ‘bring forward rule’, which allows up to three times the annual cap of $100,000 over a three-year fixed period, depending on the total amount they have in super as at 30 June in the previous financial year.

Once Mark and Emily have retired, they intend to draw a pension from their super, which includes the contributions they have made due to the inheritance.

When a gift or inheritance has been received, if it is not required for immediate expenses, then investing it or contributing it towards a super fund should be considered. If an individual can qualify, a tax deduction may be available for superannuation contributions to help build their retirement savings.

  • Education
  • Retirement
  • SMSF News
  • Self Managed Super Funds (SMSF)
  • Superannuation
  • Tax
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