A few years ago, our accountant set up a family trust and many of our investments are held in this trust. The list of beneficiaries includes my children, who are now adults and their children. My children’s own income means it is no longer viable to distribute income to them. Some time ago, I read how young people can contribute money to superannuation and claim it as a tax deduction. I am wondering if I could distribute income to my grandchildren instead and then, they could contribute the money to superannuation and claim it as a tax deduction?
This strategy you have asked about is based on the carry-over provisions of unused superannuation concessional contribution caps, where unused carry-over amounts essentially accumulate from birth. That means that after five years, a child would currently have an entitlement to contribute up to $132,500 as a tax-deductible concessional contribution to super, assuming they can make a tax-deductible contribution in the first place and some of that limit has not been already used.
In an effort to reduce tax avoidance by distributing income to children under 18 years of age (called minors), minors can only earn $416 per annum tax free from passive income sources which would include your trust distributions. Income above this threshold is effectively taxed at the highest marginal tax rate of 45 percent.
There are no restrictions on opening a super fund for a child. You should obtain a tax file number for the child to simplify the process and avoid unnecessary taxes. You should also check with the super fund you intend to use, because not all super funds will open child superannuation accounts.
At any age, your grandchildren can make non-concessional contributions to their accounts up to the non-concessional cap of $110,000 per annum and make use of the bring-forward rules, potentially allowing a contribution of up to $330,000.
Concessional contributions for a minor on the other hand, are generally not tax deductible when all the income received by the child is passive. There are exceptions and one is when the child reaches 18 years of age. Under 18 years of age, the child must derive income from employment or self-employment and according to the legislation; “attributable to activities or circumstances that result in them being treated as an employee for Superannuation Guarantee purposes”.
In a nut-shell, you would need to wait until your grandchildren get a job, before pursuing this strategy.
Superannuation is a powerful tool with many hidden secrets. You may be able to use super to assist with your grandchildren’s first home deposit.
While setting your grandchildren up for retirement is one benefit, don’t underestimate the other potential short-term uses. Your grandchildren could make use of the First Home Super Saver Scheme. This scheme allows them to contribute up to $15,000 per annum to super to reach a grand total of $50,000. They could then access this money plus the deemed earnings, to be used as a deposit on their first home. That money must be made up of extra “voluntary” contributions, so it wouldn’t include the super guarantee payments made by an employer.
IMPORTANT LEGAL INFO This article is of a general nature and FYI only, because it doesn’t take into account your financial or legal situation, objectives or needs. That means it’s not financial product or legal advice and shouldn’t be relied upon as if it is. Before making a financial or legal decision, you should work out if the info is appropriate for your situation and get independent, licensed financial services or legal advice.