Invest inheritance in super to gain best tax benefits
YOUR ADVICE
I AM single, mid 50s, earn a good salary, and plan to retire in five years’ time. I own a home worth $1.4 million outright; have $450,000 in super; and a $150,000 mortgage over an investment property worth $750,000 which I plan to pay off by retirement. I hold a small number of shares plus $30,000 in cash.
I recently inherited $500,000, and after putting aside some for my adult children, I’m not sure how to invest the balance. Should I pay off the investment loan or expand my share portfolio? I would like to retire comfortably but also have the option before retirement to give the kids the investment property – I understand the CGT liability. I have no intention of selling my home.
I am not in favour of reducing the debt on the investment property while you are working, as you would be losing your present tax benefits. The obvious place to invest the $500,000 is into superannuation as a non concessional contribution where tax on the earnings will be just 15 per cent. In view of your age, lack of access should not be a problem for you. You could then invest in shares within the low tax superannuation environment and take advantage of the present downturn in the market. If you decide to give the property away, do it in a full year of retirement before age 65 – the CGT impact should be much less due to your lower income levels and the ability to offset some of it with tax deductible super contributions.
CAN you explain the reasoning behind the “gifting” rules? I expect it was a measure by the Howard government to stop people from hiding their assets, as loans to their children.
However, the situation in Australia has changed a lot since that time and I think most retired mums and dads, who have been lucky enough to accumulate some cash, would be helping their children to get started in the property market. I would think that a level of lending/ giving of $200,000 would be a reasonable allowable amount.
It goes back a fair while – the gifting rules were $10,000 a year which the Greens tried to reduce to $5000 a year.
There was the normal argybargy that goes on in politics and a compromise was reached whereby you could still give $10,000 a year with a limit of $30,000 over five years.
This wasn’t much different from the $5000 a year it would have been if the Greens had have had their way. Don’t forget the major purpose of the deprivation rules is to prevent people giving away assets just to qualify for a bigger pension.
Of course, the way around this is to give the money before you are within five years of pensionable age – but that is still a risk. The last thing you want is to give your children money and then see half of it walk out the door if there is a marital breakdown.