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Turn a windfall into a tax deduction

Aug 27, 2019, 15:19 PM

By Graeme Colley

Graeme Colley SuperConcepts SMSF expert

So, you’ve received a windfall – a gift or inheritance. Great! But what to do now? 

If you choose to invest it, there are many ways you can do so – in your own name, jointly, via a company or family trust, or via your SMSF – each with its own advantages.

If the investment is joint, it will mean you and other owners could share in any income equally or in proportion to each owner’s share.

If it’s via a company or trust, income can be distributed to shareholders or beneficiaries of the trust.

Putting the windfall into super

You could put the money into super but won’t be able to access it again until you’ve retired or met another condition of release, which for some may be a downside.

However, on the upside you’ll pay a low tax rate on any income you receive.

Plus, it’s possible for you to receive a total tax deduction of up to $25,000, depending on what other tax-deductible contributions have been made to your super account.

Here are a couple of short case studies to give you some idea of how gifts and inheritances can be used to contribute to super.

Case study – Shares gifted to Bridget

For Bridget's 18th birthday, various family members gifted her ASX listed shares via off-market transfers.

The gift brings her FY 2019/20 income to around $50,000, including dividends, imputation credits plus wages from her part time job.

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 40 years or more down the track.

It may not even be necessary for the contributions to be made in cash. If her parents have an SMSF, Bridget may be able to transfer the shares to the fund as an off-market transfer and their value will be treated as tax deductible super contribution.

Case study – Mark and Emily’s inheritance

Mark and Emily, both nearing 65 years of age and retirement, have received an inheritance from a distant aunt. They’re interested in putting it into super to maximise the amount they have in a tax advantaged environment.

They each decide to invest part of the inheritance as a tax-deductible contribution to their respective super accounts. A $25,000 annual cap applies which also factors in compulsory employer contributions.

In addition, they’ve 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.

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