Christmas giving and SMSFs

Are you planning to give your children or grandchildren a little extra this year? Here are some ideas with a superannuation twist.

Of course, your super is yours and yours alone and you can’t give it to your kids. But if you’re already old enough to access your super, here are a few tips on ways in which you might share the love tax effectively. Or even if you’re not accessing your super to provide your gift, there are ways in which you can encourage your loved ones to involve the super system in a positive way.

Do you have a transition to retirement income stream? Don’t forget, you can withdraw up to 10% of your 30 June 2024 balance at any time in 2024/25 as a pension payment. Unfortunately you can’t usually withdraw lump sums from these pensions but you can take quite large pension payments.

Retirement phase pensions are, of course, more flexible – most people receiving one of these can take as much of their balance out as they like, any time. (The only exception is old style pensions often called “legacy pensions” which don’t provide the same level of flexibility but you’ll know if you have one of these!)

A few other interesting features of retirement phase pensions are worth bearing in mind.

Again, payments over the minimum can be taken at any time. There are good reasons to treat these payments as “partial commutations” of your pension rather than just bigger pension payments. (We explain why here.) The one thing to watch out for is that this decision has to be made before you take the money – you can’t look back at the end of the year and retrospectively ask your accountant to treat some of your payments as commutations. A neat solution many firms put in place (including Heffron) is to prepare documentation at the start of each year that provides a blanket rule that any payments over the minimum should automatically be treated this way without extra action being required by the trustee. If you don’t have this, we can prepare it for you any time.

Fully flexible retirement phase pensions also allow you to take lump sum payments (like these partial commutations) “in specie”. In other words, your fund doesn’t have to pay them in cash, it can transfer assets out of super. In fact, it can even transfer assets directly to the person you want to give them to rather than via you first. We often call this “payment by direction”. There’s some paperwork to do but it allows you to, for example:

• ask the trustee to make a benefit payment for you, but
• do so by paying out an asset owned by your SMSF rather than cash, and
• meet that payment but transferring the asset directly to someone else.

People often use this technique for transferring property because it means there is only one transfer. Of course – it’s important to look into all the tax consequences (the asset is still technically being “sold” by the super fund, incurring capital gains tax) and other issues such as stamp duty.

Or what if the money you’re giving the young ones in your life has nothing to do with your own super? It might still involve theirs.

In a previous article (read it here) we touched on two neat super opportunities that are often overlooked because they primarily target young people who probably aren’t thinking too much about super.

First, the Government co-contribution scheme – the one I describe to my sons as “free money from the Government if you’re willing to put some of your own into super”. For the people who meet the requirements, this gives members who put $1,000 into super a “bonus” super contribution from the Government of up to $500. (There are rules, limits, means tests and all the usual things but it’s worth looking at.)

If you want to help your young person take advantage of this scheme, don’t forget you can’t make the contribution for them – you’ll need to give them the cash for them to contribute to their own super fund.

Second, the First Home Super Saver Scheme (FHSSS) – which allows some of a member’s super to be released (no matter how old they are) to help buy a first home. Again, there are rules, limits and tax consequences (see our article for more details). And unfortunately this scheme doesn’t extend to the compulsory contributions that have been made to super – it only allows voluntary contributions to be released.

Again, you can’t make the contribution for your young person but you can certainly provide the money to do it. If you’re receiving income from a family trust but they’re also potential beneficiaries of this trust, you could even consider:

• Making a distribution to them from the trust,
• They put it into super and claim a personal tax deduction for it (so the distribution doesn’t add to their income).

Note that most people need to be over 18 before they can claim personal tax deductions for super contributions. But if they can make it, it’s a voluntary contribution so it’s available to be withdrawn under the FHSSS.

Make sure you both understand exactly how the scheme works before doing this but it could be quite a tax effective approach. (And remember you want the tax deduction and the trust distribution to be in the same tax year for them – so you’ll need to make the distribution before 30 June 2025 to give them the cash early enough for their contribution to go back into their fund before the end of the year.)

Even if their only voluntary contributions are the $1,000 you give them each year to help them secure the Government co-contribution, over 10 years that adds up to a $10,000 nest egg for their home deposit. (In the background, the Government has also given them a bonus $5,000 which will have to stay in their fund.)

Super and Christmas aren’t an obvious pairing but there are definitely some things to think about when planning financial gifts around Christmas.

Some of these opportunities require paperwork – that’s where our expertise can help. Contact us for help on any documents you need for taking money out of super.