Inheritance of mother’s house raises minor issue

NOEL WHITTAKER

MY elderly mother lives in the family home independently and is in good health. It is her only major asset. She wishes to leave the house to my sister, myself and my son, who is a minor. I expect and hope my mother will be with us for many years to come. However, if my son inherits his third of the house as a minor, I wonder about the tax implications?

As the property is your mother’s residence, it will pass to the beneficiaries free of capital gains tax at its value at the date of death. Given that it is somewhat unsatisfactory to be a part-owner of a property, your son’s best course of action, if he is an adult when the share of the house is left to him, may well be to sell it tax-free, and use the proceeds as a deposit on a place of his own.

I suggest you speak to a solicitor to ensure the will covers bequests to a minor – you do not want a situation where one beneficiary is a minor and the executor is arguing with the family about the sale of the property. I AM concerned about Labor’s proposed limit on the ability for people with low taxable incomes to get tax refunds on franking credits from their shares. What would the effect be on dividends taken as part of a dividend reinvestment plan? Would new shares be limited to the franked amount only, or would they include the franking credit? In other words, can a dividend reinvestment plan be used to claw back franking credits that would otherwise be unused or not refunded?

The fact that a dividend is reinvested in additional shares instead of being deposited to a bank account does not affect the tax treatment. The amount of the dividend, plus franking credits, is added to your taxable income. Under the Labor proposal, the franking credits could still be used to reduce your tax payable, but if no tax is payable, the excess franking credits will not be able to be refunded to you. I HAVE a question regarding tax-free and taxable amounts in accumulation and pension phases. One of my super funds has advised that all earnings from the investment will go into my taxable component, while leaving my tax-free amount unchanged. If this is true, it has tax implications for my beneficiaries. The other fund credits the earnings proportionally. The former is in accumulation mode, the latter in pension mode. I would greatly appreciate clarification.

‘You do not want a situation where one beneficiary is a minor and the executor is arguing with the family’

The key lies in the fact the two funds are in different stages. When a superannuation fund is in accumulation mode, all earnings are added to the taxable component.

However, when earnings from the assets are funding a retirement pension account, they will be split between a taxfree component and a taxable component based on the percentages of the components on the commencement of the pension account. Noel Whittaker is the author of Making Money Made Simple and other finance books. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. Email: noel@noelwhittaker.com.au