Many in retirement are travelling comfortably, with three key factors contributing to their happiness – good physical and mental health and enough money to enjoy life.
Perhaps the assumption that markets are still anchored by predictable economic policies needs to be challenged. For the first time since the fall of the Berlin Wall, political volatility – once background noise – is potentially reshaping investment risk at a structural level.
Massive intergenerational wealth transfer comes with tax pitfalls
Tax liabilities are the biggest concern for beneficiaries of an estimated $3.5 trillion to $5 trillion windfall from the intergenerational wealth transfer, according to analysis from Fidelity International, a global fund manager.
Australia does not have an inheritance tax, but there are myriad potential capital gains and income tax traps for those receiving cash, property, shares, superannuation or other assets.
Mark Chapman, a director at tax specialist H&R Block, says: “The aim of many is to ensure that their wealth cascades down the inheritance chain to their children and grandchildren intact.
“So, does that mean that you can pass your wealth down to your children entirely tax-free? Well, perhaps, although it depends on the way in which the wealth is passed down.”
Anna Hacker (pictured), client director in estate planning for the accounting and advisory firm Pitcher Partners in Melbourne, adds: “What you want to achieve with your will might not be as straightforward as you think. You need to get advice.”
An estimated $224 billion a year in inheritance is expected to be passed on by baby boomers through to 2050, according to estimates by the Productivity Commission. Other estimates claim the figure is much higher.
The Australian Taxation Office (ATO) is targeting succession planning, particularly increased use of trusts and family offices, which correctly used can be very effective in reducing tax and other liabilities.
According to Fidelity, which has more than $15 trillion under management, Generation X-ers, aged 44 to 59, are likely to be the major beneficiaries, with about one-third expected to inherit more than $500,000.
Taxation issues topped the list of 10 main concerns, which also included worries about how to manage the assets, emotional stress, potential family disputes and legal issues. Ethical considerations were the lowest-rated.
Lauren Jackson, Fidelity’s head of wholesale, says: “Many require guidance on debt management, investment strategy, alignment with personal values, and managing family dynamics.”
Experts recommend seeking advice to preserve the estate’s value and provide maximum benefit to the beneficiaries. They warn capital gains tax (CGT), income tax and potential international taxes can impact the value of an estate.
They also encourage focusing on appointing the right people to key roles, such as executor, who administers a deceased’s estate, to ensure they have the relevant experience, knowledge and emotional capacity.
Key tax issues to consider:
Family home: It is generally exempted from CGT where the executor or beneficiary disposes of the property after death. According to Chapman, a full exemption applies where the dwelling is sold within two years of the date of death.
“The property must have been the deceased’s main residence just before death and was not at that time being used for income-producing purposes,” he says.
When a house is also the home of the deceased’s spouse, or someone who had a right to occupy the dwelling under the terms of the will, it is exempted until they die.
Gifting assets: Cash is not subject to CGT. But gifting other assets while still alive, such as shares in an investment property, will trigger a CGT charge based on the difference between the market value of the asset at the time of the transfer and its cost base, typically the original purchase cost.
“But if you have either brought forward or have current-year capital losses, you can transfer CGT assets to your family while you are still alive and use those capital losses to shelter the capital gains that will arise,” says H&R Block’s Chapman.
That means the person making the gift can make a tax-free transfer and the beneficiary will have a lower CGT bill when the assets are sold. Other assets, including antiques, cars and collectables, can be gifted tax-free if the gift was acquired for $500 or less. CGT does not have to be paid on more valuable gifts until the asset is sold. Their deemed value, which will be deducted from your proceeds when sold to give you a capital gain or loss, depends on when it was acquired by the deceased.
Superannuation: Tax payable on inherited super depends on a wide range of issues such as whether the beneficiary is considered a “tax dependent”, including a spouse or child under 18, or benefits paid as a lump sum or income stream. For example, there is no tax on the lump sum for a tax dependent.
For others, a super fund will withhold between 17 per cent and 32 per cent, including the two per cent Medicare levy. The amount depends on whether the payments into super were concessional or non-concessional.
