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A Gift From the Taxman - Eureka Report Article

A gift from the taxman
By Scott Francis

PORTFOLIO POINT: Being tax-free, a cash gift from a retiree effectively expands in the hands of the next generation. It's a useful strategy for passing on wealth.

Estate planning is not an area renowned for innovation but the new rules for superannuation are throwing up lucrative options, especially when it comes to exploiting salary sacrifice.

With the proposed superannuation changes, which seem increasingly likely to pass into law, thought has to be given as to the most effective way to transfer assets between generations

Much commentary has been made on the issue of people being better off in transferring assets to non-dependents such as transferring assets to adult children prior to the death of the asset holder. They can make this transfer by making a tax-free withdrawal from superannuation and passing the money directly to their children. This is known as "gifting". The alternative, where assets are passed to non-dependent adult children after death, would make those assets liable to tax of up to 16.5%.

This is a significant amount of money. Consider a superannuation fund with a $500,000 balance: 16.5% of this is $82,500, which would be a significant "leakage" through tax.

There are other reasons that people look for strategies to transfer some wealth to the next generation prior to their death, including the demographic change that people are living longer. Increasingly, I am dealing with clients who are looking for simple ways to provide some financial support to their adult children before they die.

This article offers one strategy for people with surplus assets to do just that.

The strategy is "gifting". Keep in mind that there are restrictions on how much a person receiving Centrelink benefits can gift away. This limit is $10,000 a year and a total of $30,000 over a five-year period. If you receive Centrelink benefits, you should keep the gifting rules in mind with any strategy that you implement.

The proposed superannuation changes will allow:
  • People over the age of 60 to withdraw their super tax-free.
  • The investment earnings of super funds paying an income stream to be tax-free.

These two conditions mean that a person aged over 60 can effectively be living in a tax-free environment. So, the question is: Can this tax free environment be used to benefit others in the family?

The answer is yes. If surplus superannuation income is gifted to a person, on the basis that the gift replaces income that is salary sacrificed to superannuation, then less tax will be paid.

A case study

Let us consider a 60-year-old retiree, who is living on an income stream from his superannuation assets and would like to help his 30-year-old son build a stronger financial future.

The retiree has the capacity to comfortably withdraw $5000 a year from his superannuation assets to pass on.

The son is earning $50,000 a year and facing a marginal tax rate of 31.5%. If he agrees to use the gift to replace $5000 of his after-tax salary, he can now afford to salary sacrifice $7300 of pre-tax salary to superannuation. This is because he needs to earn $7300, taxed at 31.5%, to have $5000 after tax. The $5000 tax-free gift is worth $7300 of pre-tax earnings.

This $7300 can then be salary-sacrificed to superannuation, where it is only taxed at 15%. That is, $1095 goes in tax, reducing the salary sacrifice contribution to $6205.

The effectiveness of this strategy is that the gift from a tax-free source allows the saving of tax in the recipient's hands. The $5000 gift effectively becomes a $6205 after-tax superannuation contribution. It effectively becomes a gift that is leveraged by the tax saving allowed, by making a superannuation contribution taxed at 15% rather income that is taxed at 31.5%.

Suddenly the tables are turned. Rather than having superannuation assets taxed at 16.5% when they are passed to non-dependents on a person's death, they are now actually working to save tax!

The following table compares the tax savings based on the tax rates of the person who receives the tax-free gift, and then salary sacrifices it to superannuation.

nTax savings on $5000 tax-free gift salary-sacrificed to super


There are going to be many different strategies that will use the proposed superannuation changes to pass wealth between generations. This strategy relies on the person receiving the gift to make the salary-sacrifice contributions to superannuation. If they do this, a $5000 gift is multiplied through tax savings, providing a leveraging effect that stands in contrast to the taxes paid on death that decrease the effectiveness of a person's estate.

Keep in mind that the gift does not have to be as large as $5000 to make a difference. A $500 gift, allowing a $620 annual after-tax contribution to superannuation, will make a difference over time, given that it will be compounding in the low-tax environment of superannuation.