Tax on Inheritance - buying PPOR

Hi All,

Hopefully not too offtopic however I'm posting on behalf of a family member who received an inheritance in the last tax year of 500k from their parents Super - They are now looking at buying a property (PPOR) however the additional taxes/levies etc seem to be eating away a large amount of that total amount. They were not categorized as a dependent (they are over 18 etc), and the father was under 65 - Unfortunately the Super was not setup in the best way to minimize tax for the dependants.

They have gone through a tax accountant since, however wanted to check they weren't going about this the wrong way - they are on a yearly salary of 50k, so the Taxable Income has been calculated at 550k on the 16-17 return.

Based on some prior research they were expecting the 15-30% tax on the total lump sum, however now found after lodging with an accountant that they will be also slugged with the following charges:

Medicare Levy @ 2% - around 10k total

Temp budget repair levy @ 2% above 180k - Around 7k total

HECs - all of the outstanding amount owing (@ 8% of total yearly income)- around 40k total

Luckily they were waiting to lodge the tax before buying any properties, however the total amount they have to spend on the PPOR is significantly lower than originally thought.

Has anyone else had a similar situation?


Thanks
JohnFS

 

Depending on current debt level then on 50k may be able to get a top up loan?

Talk to a broker to determine borrowing capacity, all things considered.

 

Depends On a lot of things. Was the super paid directly or via the estate. Is the beneficiary a spouse or tax dependant. What components of the super are - taxable and non taxable etc

 

Was the super paid directly or via the estate. Paid Directly
Is the beneficiary a spouse or tax dependant. No, didn't qualify as a Tax Dependant
What components of the super are - taxable and non taxable etc approx 450k Taxed, 15k Untaxed

 

I once did a calc and asked a group of staff what the highest possible marginal tax rate was when all levies and adjustments can occur. Nobody came close.

Its was around 78%. Changed a little but not a lot. You could add:
- Div 293 tax (Extra 15% tax on super contribs)
- Medicare Levy Surcharge (another 2% on top of Medicare)
- Loss of the x % private health insurance offset
- Impact on child support / debt
- Impact of Centrelink benefits already received (clawback)
- Impact on adult child residing at home - Loss of Newstart
- Loss of Centrelink rent assistance
- Health care card
...Means testing for legal aid and lots more

There are some aweful aspects to tax that add to income then give a tax offset and this means the levies and additional taxes still apply. Its not just a 15%-30% "death" tax on untaxed super !!

 

There is a strategy that may have been lost already. A deceased estate need not pay all benefits in one tax year. There can be up to three tax years with little complexity depending on beneficiaries and will etc. Many deceased estates will pay out benefits over more than one benefit distribution. There may even be a sound legal reason to pay after 1 year+1 day....working in favour of the strategy. But typically it can be problematic for an estate to withhold paying benefits to merely access a tax benefit. Things like sale of property etc can complicate things and allow 2+ distributions.

Legal advisers who know tax well are a subset of solicitors who do estates.

 

Binding beneficiary distribution to the estate and a testamentary trust wouldve been good here.

 

Taking it out of super before dying would've been best! (nb: assuming there is an up to date Will which takes account of that)

 

Yes possibly if the beneficiaries would have been the same. This is why it is good to have a ePOA in place. One of my clients saved hundreds of thousands in tax by doing this.

 

Under 65 not likely. Anyway testamentary trusts are better.

 

Depends. If terminal illness super can be withdrawn, tax free possibly, at anytime.

 

Paul is spot on. Sometimes the loss or payback of government benefits are the real killer.

There used to be a program called MOTHER that would let you model those tax decisions but they guy stopped development. It was a great tool and havent found one like it since.

You know of one @Paul@PFI

 

The issue that may have been lost here is the VAST number of taxpayers who will also do what the deceased did. I would argue most taxpayers in industry funds are ignorant to the issue and almost anyone who has nominated a spouse to their fund may have the same problem. They have ignored it.

Seek financial advice. The cost of financial advice would have been quite low - Maybe a few thousand dollars at best. It would have advised that the deceased draw a vast amount if not all of the super and re-contribute it when aged between 60-65. (Nobody should do this without seeking personal advice !)

Sometimes there are strategies of keeping taxed and untaxed benefits in separate funds or accounts too.

This would have saved $125K in tax that would have directly benefited the beneficiary.

We see this stuff daily and it should be a lesson to anyone aged 60 to get financial / tax advice on the impact of tax on death benefits. Death benefits paid from super are often taxed....Assuming your spouse will survive you is a fatal flaw in the process.

 

Why are only those in industry funds affected by this? (if someone has a poa they may be able to withdraw super before the account holder's demise if they otherwise meet the conditions of release & it's easier with a SMSF).

Also shows the importance of having annual or more frequent reviews eg when children cease to be dependents/leave home

 

It is not an industry funds issue - it is a tax matter for all superannuation funds.

The tax treatment of a super asset can be planned and mitigated. Sadly most people I. Industry funds never seek advice - or even worse - their accountant is only interested in preparing a government form and never thinks about how they can help the client.

 

And sometimes the client is offered a strategy to assist, a quotation given and you never hear from them again.

 

Yep - it is amazing how so many people prefer to lose 70k and save 2k.

 

But that'll cost me money Now.

 

Because 2k is up front and the strategy is for after your dead. Most people lack imagination.

 

I often hear parents say that the kids will get too much when they die. They want to stop the kids getting all this money as they will not appreciate it. But they do not want to give it to a charity or to the government.

Or the parents have said that I need to present it to the kids and see if the kids want to pay for it.

Or they just don't believe me that the tax event will occur. "If you prove correct I will apologise then".