How to boost your super with a lump sum

If you’re lucky enough to have received a windfall, perhaps an inheritance or a retrenchment payout, your first decision will be what to do with it.

Assuming you have decided against a shopping splurge, finding the best place to invest a lump sum is all about the effect on your tax bill and how soon you will need access to the funds.

For those interested in investing their lump sum for a longer term, superannuation is one approach because of its tax benefits.

But be aware that, while super can be a tax-effective investment, there are limits on how much you can pay into your super without having to pay extra tax. These are known as contribution caps.

Different types of contributions

There are two types of super contributions you can make – concessional and non-concessional – and contribution caps apply to both.

Concessional contributions are paid into super with pre-tax money, such as the compulsory contributions made by your employer. They are taxed at a rate of 15 per cent.

Non-concessional or after-tax contributions are paid into super with income that has already been taxed. These contributions are not taxed.

So, the tax you pay depends on whether:

  • the contribution was made before or after you paid tax on it
  • you exceed the contribution caps
  • you are a high income earner (If your income and concessional contributions total more than $250,000 in a financial year, you may have to pay an extra 15 per cent tax on some or all of your super contributions.)

Investing after-tax income

There are many different types of after-tax contributions that can be made to your super including contributions your spouse may make to your fund, contributions from your after-tax income, an inheritance, a redundancy payout or the proceeds of a property sale.

Based on current rules, the annual limit for non-concessional or after-tax contributions is $110,000. You can also bring-forward two financial years’ worth of non-concessional contributions and contribute $330,000 at once but then you can’t make any further non-concessional contributions for two financial years. Note that are certain limitation on these types of contributions.

It is also useful to note that, under certain conditions, there are some types of contributions that do not count towards your cap. These include: personal injury payments, downsizer contributions from the proceeds of selling your home and the re-contribution of COVID-19 early release super amounts.

The Downsizer scheme allows the contribution of up to $300,000 from the proceeds of the sale (or part sale) from your home. You will need to be above age 55 but there is no upper age limit, the home must be in Australia, have been owned by you or your spouse for at least 10 years, the disposal must be exempt or partially exempt from capital gains tax and you have not previously used a downsizer contribution.

Giving your super a boost

A review of your super balance and some quick calculations about your projected retirement income might inspire you to give your super a boost but not everyone has access to a lump sum to invest.

A strategy that uses smaller amounts could include any amount from your take-home pay. These contributions will count towards your non-concessional or after-tax cap.

Alternatively, you add to your super from your pre-tax income using, for example, salary sacrifice. These types of concessional or pre-tax contributions attract a different contribution cap: $27,500 per year, which includes all contributions made by your employer.

If your super fund balance is less than $500,000, your limit may be higher if you did not use the full amount of your cap in earlier years. You can check your cap at ATO online services in your myGov account.

The rules for super contributions can be complex so give us a call to discuss how best to maximise your benefits while avoiding any mistakes.

Managing the costs of raising children

It is a special feeling to welcome a new child or grandchild into the world and watch them grow. Sharing their joy as they reach new milestones is priceless.

Of course, there is a real cost – raising a child is expensive, particularly now as the cost-of-living spirals higher. Estimates vary widely from the few studies completed but it is fair to say that over a child’s lifetime families can spend hundreds of thousands of dollars on living, medical and schooling expenses for their children.

So, having a financial strategy in place to cover the costs and taking advantage of government support where available can make a big difference.

Taking care of the basics

The first step is to update your Will to nominate guardians for your children in case the worst happens. You may also consider life insurance and income protection to ensure your family is protected.

Next, a savings and investment plan will help you navigate the years ahead with more certainty. Adding small amounts of money regularly to an account for education and other expenses can help to ease financial stress. The MoneySmart savings goals calculator shows what can be achieved. You could consider fee-free high interest savings accounts or your mortgage offset account as a way to save cash for short-term needs.

Meanwhile, some longer-term investments such as shares, exchange traded funds or listed investment companies may provide financial support for later expenses. They can offer the possibility of capital growth and diversification for a relatively low cost.

Super splitting

Keeping an eye on the future also means thinking about your superannuation. If one partner is staying at home to care for the children, the other partner can split their super contributions with them. You will need to check if your fund allows it, whether they charge a fee and complete some paperwork.

There are also some tax considerations, so it is important to make sure you understand the implications for you.

Government support

Take the time to discover the government payments and supports available for families. For example, the Paid Parental Leave Scheme provides support for mothers for up to three months before the birth.

A recent change to Parental Leave Pay and Dad and Partner Pay sees these two payments combine into one payment that is available to both parents for up to two years after the child’s birth.

You will need to meet income and work tests and claim within certain timelines.

Even if you are not eligible for parental leave pay, you may still be able to apply for both the Newborn Upfront Payment and the Newborn Supplement.

Then there is the Family Tax Benefit, a two-part payment to help with the cost of raising children. To receive the benefit, you must have a dependent child or a full-time secondary student aged 16 to 19 who is not receiving any other payment or benefit such as a youth allowance, care for the child at least 35 per cent of the time and meet an income test.

Grandparent gifting

Grandparents who are keen to help out their families financially can gift money to their children or grandchildren. Be aware that Centrelink has gifting rules for those receiving an age pension. You can give $10,000 in one year or up to $30,000 over five years without your pension being affected. If you give more, the amount will be treated as though you had retained it in your own accounts.

However, gifts and inheritances are generally not considered as income for tax purposes. The ATO says neither the donor nor the receiver will pay tax on a gift if:

  • it is a transfer of money or property.
  • the transfer is made voluntarily.
  • the donor does not expect anything in return.
  • the donor does not materially benefit.

Tax may apply in some cases where property or shares are gifted.

The joys of raising a little one are many, and having a plan to manage the financial implications can let you enjoy the journey. Get in touch with us to create a plan to secure your family’s future.

Trusts and the new super tax rules

Ensuring you’ve structured your finances tax-effectively is always a concern, but with new tax rules for super on the horizon, many people with large balances are considering alternative vehicles to save for retirement.

Unsurprisingly, this has sparked a renewed interest in an old favourite – trusts.

Trusts have always been popular in Australia, with the government’s Tax Avoidance Taskforce (Trusts) estimating more than one million were in place in 2022.

Separating ownership using a trust

The popularity of trusts for business, investment and estate planning purposes is due to both their flexibility and inherent benefits, particularly when it comes to managing your tax affairs.

At their heart, trusts are simply a formal relationship where a legal entity holds property or assets on behalf of another legal entity.

This separation means the trustee legally owns the assets, but the beneficiaries of the trust (such as family members) receive the income flowing from the assets.

A common example of a trust structure is a self managed super fund (SMSF), where the fund trustee is the legal owner of the fund’s assets, and the members receive investment returns earned on assets held within the SMSF trust.

Which trust is best?

There are many different types of trusts, with the appropriate structure depending on the financial goals you’re trying to achieve.

For small businesses and families, the most common trust is a discretionary (or family) trust. These vehicles are very flexible and can be used with immediate and extended family members, family companies or even charities.

In a discretionary trust, the trustee has absolute discretion on how both the income and capital of the trust are distributed to various beneficiaries.

This gives the trustee a great deal of flexibility when it comes time to allocate income to family members paying different marginal tax rates.

Advantages of a trust structure

Discretionary trusts offer tax, asset protection, estate planning and property holding benefits.

They can also assist with the accumulation of assets for younger generations within your family and provide opportunities for the discounting of capital gains.

For small businesses and farming operations, a discretionary trust can be used to provide valuable asset protection. If your business goes bankrupt or a beneficiary is divorced, creditors will be unable to access assets or property held within the trust as it is the legal owner of the assets.

Building wealth outside super

With new tax rules for super fund balances over $3 million being introduced, trusts also provide a useful tool to consider for continued wealth accumulation.

Unlike super funds, trusts don’t have annual contribution limits, restrictions on where you can invest or borrowing limits. Money can be added and removed from the trust as necessary, providing significant financial flexibility.

Discretionary trusts can also be used with vulnerable beneficiaries who may make unwise spending decisions. The trustee can decide to provide a spendthrift child or a family member with a gambling addiction regular income, but not large capital sums.

Holding ownership of assets within a trust is useful for estate management, as the assets will not be part of a deceased estate, avoiding the possibility of a Will being challenged.

Trusts aren’t always the solution

Although trust structures provide many benefits, there are also tax issues that need to be considered. For example, any trust income not distributed to beneficiaries is taxed at the top marginal rate.

Distributions to minor children are taxed at higher rates and a trust is unable to allocate tax losses to beneficiaries, so they must remain within the trust and be carried forward.

Trusts can be expensive to set up, administer and dissolve when they are no longer needed and the trustee’s actions are restricted by the terms of the trust deed.

If a family dispute arises, running a trust can become difficult and making changes once it is established isn’t easy.

If you would like to find out more about trusts and whether one is appropriate for your business or family, call us today.