I got lucky and sold all my investments at the top of the market in late 2019. Now I am sitting on cash and wondering what to do with it. I have 15 years until retirement and would be prepared to non-concessionally contribute to topping up my super although I have a very healthy balance already. I would also like to gift a substantial amount of the balance to my two teenage children. I was considering encouraging them to invest through one of the robo-digital investing tools available online to take advantage of these depressed share prices, and also so they could build a nest egg to purchase an apartment in the next 10 years. However, I am also weighing up whether it would be better to purchase an investment property now given the likely impact on property values from COVID-19. What is your advice on gifting in general, and these proposed alternatives for the funds?
Nic in Surry Hills, NSW
Top answer provided by:
Straight away I see many reasons for you to get in front of a Financial Adviser as they will have an in-depth discussion to understand your current position in more detail and provide a recommendation in line with your goals and objectives.
Given that you sold your investments in this Financial Year, you could potentially have some Capital Gains Tax (CGT) implications. First thing I would consider would be utilising concessional contributions to offset the potential CGT hit.
From 1 July 2018, individuals can make ‘carry-forward’ concessional super contributions if they have a total superannuation balance of less than $500,000. Individuals can access their unused concessional contributions caps on a rolling basis for five years. Amounts carried forward that have not been used for five years will expire.
To work out your unused Concessional Contributions Cap for a financial year, you will need to consider:
- Superannuation Guarantee (SG) Contributions
- Salary Sacrificed Concessional Contributions made by your employer on your behalf
- Personal deductible contributions
The standard Concessional Contributions cap is $25,000, however, the carry-forward rule has the effect of increasing the cap, depending on prior years’ contributions. Therefore, for the 19/20 Financial Year, the amount you could make as a Concessional Contribution (and therefore claim a tax deduction for) may be $50,000 less any of the above contributions you have made since 1 July 2018.
It is very difficult to provide advice about what you should do going forward (i.e. Non concessional contributions vs investment property vs shares for children) without going through the process of drilling down on your goals and objectives. It is important to go through the process with an adviser as, any decision you make now, will have enormous ramifications for your financial future.
Whilst a large portion of your question is focused on gifting and providing for your children’s future home deposit, it is a good opportunity to shed light on an investment vehicle that does not get enough attention – investment bonds.
Investment Bonds (also known as insurance bonds) are managed fund investments provided by a life company which let you invest on behalf of a child and have the ownership automatically transferred to the child at a date in the future. This could potentially aid your goal of providing a house deposit for your children in 10 years.
An investment bond is generally considered a ‘tax paid’ investment. The life insurance company pays tax on earnings within the bond at a rate of 30% and, after 10 years, you can withdraw the value of the bond with no further tax payable. This makes an investment bond a simple investment structure because there is no requirement to declare interest or capital gains in your tax return.
Withdrawals can be made from the investment bond at any time; however, you may be liable to pay some tax if a withdrawal is made within 10 years from the bond commencement date.
Investment bonds provide flexibility for you to make additional contributions at any time (which will engage your children to contribute to it themselves and learn about investing), however, it is important to note that contributions in any one year cannot be greater than 125% of the previous year’s contribution.
Also, if you do not contribute for a year, you will not be able to contribute the following year as 125% of $0 = $0. Your only option in this scenario is to create another investment bond, restarting the 10-year period.
Some other features that investment bonds allow for which may be applicable to your transfer of funds to your children:
- Start investment with as little as $1,000
- Various investment options including Australian and international shares/ETF’s
- Nominate intended use of the funds (e.g. school fees, home deposit)
- No tax implications once ownership is transferred
- Control of how much a child can access each year
This could be an option for you if you are a high-income earner who has a marginal tax rate of > 30%. Ensure you talk to a Financial Adviser & Accountant to see if this vehicle and the investments within it would appropriate for you.
I hope this helps and all the best with your future investments.
While the Adviser Ratings Website facilitates the question and answer functionality, all such communications are between users and authorised financial advisers, of which Adviser Ratings has no affiliation. Adviser Ratings is not the advice provider and does not provide financial product advice and only provides information that is general in nature.