Ask Noel: What’s the best way to invest a child’s inheritance?

Ask Noel: What’s the best way to invest a child’s inheritance?

Which would be the more effective vehicle to invest a $40,000 inheritance for my 14-year-old son with a five to seven-year time frame while he builds his own savings towards a property purchase? Managed funds or insurance bonds?

The problem for parents investing on behalf of children is that they can easily fall foul of the punitive children’s tax laws if they invest in their own name, or as trustee for the child. This is because income is taxed at the top marginal rate once it exceeds $416 a year. This is why I prefer insurance bonds.

Because the bond earnings accrue in the form of bonuses that are added to the bond’s value, there is nothing to declare on anybody’s tax return each year. When the child reaches 18, the bond can be transferred to them tax-free, or just left alone until the parent or grandparents feels it is appropriate to transfer all or the part of the money to them. It’s important to take advice before investing in insurance bonds to ensure you get one that fits your goals and your risk profile.

Please could you tell me if the family home becomes an asset for pension purposes on the death of a spouse?

Provided the survivor continues to live in the house, it should continue to be exempt from assessment by Centrelink.

Can I deduct the land tax I paid on my investment property as a tax deduction?

As long as the property is income producing, or available for rent, outgoings such as insurance, maintenance, rates and land tax are tax deductible. If the property is not income producing because it is a holiday home kept for private use, or vacant land, the above expenses can be added to the base cost to reduce capital gains tax when sold, provided it was acquired after August 20, 1991.

My wife and I have five years to retirement. Recently we paid off our family home. We purchased a rental property five years ago and have paid interest only at 4.8 per cent. The rental has appreciated in value during this time. We are both in reputable super funds but have never paid additional contributions. Do we focus on paying off the $350,000 owing on the rental property or stay interest only and make additional contributions to superannuation?

I assume you are both working. In which case you are better off to top up your concessional contributions to the maximum allowed of $25,000 a year including the employer contribution.

This is because such contributions lose 15 per cent, whereas money taken in hand is taxed at your marginal rate. When you retire, you could opt to take enough money from your super to pay the loan out, but a better option may be to take out sufficient funds to reduce the loan to a situation where the property becomes neutrally geared and accordingly does not require any more cash injection from you. This will enable you to maximise the amount you are holding in super which should mean your retirement funds should last much longer.

Note that banks have tightened their lending criteria and some borrowers are finding they are forced to pay principal and interest when the interest-only period ends, as refinancing options are less available than they used to be. It might be worthwhile talking to a good mortgage broker.

I am 64 and turning 65 in late August. I have sold my house with settlement in early August. I will deposit $300,000 into my super account before I turn 65 after settlement as allowed under current legislation. After the changes from July 1 allowing home owners over 65 who sell their property to deposit $300,000 into super from the sale, am I eligible to do this? That is $300,000 before 65, plus $300,000 after 65 from the sale of the property. It looks like double dipping but due to the timing it may be  within the guidelines.

What you say is fine – you can make both contributions. Due to your age you are eligible to use the bring forward rule and the amount that can be contributed to super under the new downsizing rules is not dependent on your age, your employment status, or the amount you are ready hold in super.

I am a self-employed contractor working through a company, over 65, and have a self-managed super fund. My wife acts as the company bookkeeper. Now that I have reached 65, am I required to switch my fund from accumulation mode to pension mode? Can I continue to pay my wife a salary of $10,000 for the work she does and so be able to make a concessional contribution for her of $25,000 a year?

There is never any requirement to move from the accumulation stage to the pension phase. If you stay in accumulation the fund will continue to be taxed on income at 15 per cent but there is no requirement to make withdrawals. If you move to pension mode, the fund will become a tax-free fund, but will require a minimum withdrawal each year. It’s a matter of asking your adviser to do the sums. And you can continue to pay your wife a salary as long as the work she is doing is genuine and the pay is reasonable for the job.

  • Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance.