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The legalities of salary sacrificing as tax-free inheritance

I’m 43 and want to provide a lump sum gift for my children – who are all under six years of age – when I retire at 65. I was considering salary sacrificing a portion of my salary into super and withdrawing that portion tax-free when I retire and distributing it to them as a gift. Would you advise this and what are the tax implications?

Considering you’re 22 years from retirement and your kids are under six and have great parents who think about them, the timing looks good. Under current laws, you could access your super tax-free after 60 if you decide to retire and you could even start accessing it at 55 if you wanted to work part-time into full retirement under something called transition to retirement.

Salary sacrifice is a very tax effective way to build up your super as money that might be taxed at the top tax rate – 45 cents in the dollar – instead is taxed at only 15 per cent!

Another good thing about your idea is that you have more than 20 years to retirement and that means you could experience two or three bull markets in that time – if your super fund averages are a low eight per cent, your lump sum in super would double every nine years and so the more you can get into your super the better. OK, that’s the good part, but what else should you consider?

First, will you need to access the money for your kids along the way to their 20-something status? Have a good look at your cash flow and if you think you can make out with less cash then go for it. Also, with salary sacrifice you can stop if cash is tight, but accessing your super money is so hard to do, I’d rule it out unless you were heading for the poor house.

One other consideration might be: would another investment do better? The answer is yes, but knowing what investment is really quite hard. We do know a few investments are treated so favourably in tax terms and the fact that you can’t get your hands on the money means it is more likely that your dream to help your kids will come true.

Ideally, you should do a financial plan to ensure you can meet all of your goals, but at least the plan-on-the-run you’ve thought up has a lot of merit.

For advice you can trust book a complimentary first appointment with Switzer Financial Services today.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Published on: Thursday, September 30, 2010

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