Structuring your tax affairs to help your children buy a house is a common objective for many founders of family owned businesses. And engaging with your Perth tax accountants to help you structure your tax affairs can create successful outcomes including using your super fund to help your kids buy their first home.
Strategy one – buying the home in the super fund
If your children are young and you have found an ideal house for them later-on: buying the home in your super fund can be a decent outcome. However, it is important to note that the home you purchase in your superannuation fund cannot be rented to family members.
A common strategy in this instance is to purchase the family home in a super fund and proceed to repay the loan using concessionally taxed income like employer superannuation contributions and superannuation fund income. In retirement the family home can be sold tax free to a child (or taxed at 10% depending on the value of the super fund) and the child can then pay the fund the purchase proceeds.
Depending on the wealth of the family the fund can then pay a lump sum payment, in retirement, to the parents who can then use these proceeds at their discretion. One discretion can be to then gift to the children the same proceeds that the kids use to buy the home.
Classically a self-managed superannuation fund is used to purchase the residential property. So, understanding the benefits and downsides of a SMSF is an important step before you start.
The primary importance of this strategy is that the home is always rented our to a third party. And if the home is sold to the children it is sold at market value.
Strategy two – use the fund pensions to finance the home
If your superannuation fund (including a SMSF) is in pension phase you have a minimum pension you must take from the fund. However there is no maximum pension you can take from the fund.
So potentially a family can use the capital in their super fund to purchase a home for their children. And for high value funds (those in excess of the maximum pension cap of $1.7m) these proceeds can be used from the funds in accumulation to preserve the superannuation monies in a tax advantaged pension phase.
Of course, the decision to make such a withdrawal should be done with a licensed investment advisor or a personal financial planner. It is pointless to take a large amount of money from the superannuation fund to help the children if your investments cannot support your forecast lifestyle.
Strategy three – use the first home super saver scheme
If you give your child $15k, and the child contributes $15k as a first home super saver contribution, the child will enjoy a tax deduction of $15k. So potentially, for a family in business, after engaging with tax advice from their Perth tax accountant, could distribute say $15k of income from their discretionary investment trust and then give that money to the child in cash. This will then be tax assessable to the child who will then enjoy a tax deduction for the same amount (resulting in a nil tax outcome).
The net effect of this strategy is that the child now has $15k in their super fund that suffers tax of $2,250. If you compare this to the parents taking the same money in cash, after suffering the highest marginal tax rate, the tax burden is $7,050.
Given that, over 4 years, the parents can contribute $50k to a child for their super fund the net cash available for the first home deposit will be $42,500. If the same strategy was to just take the same $50k and incur tax on it (and then give it to the child) the child would end up with $26,500.
When the child retrieves the super monies there is a further tax payable (maximum of 17%) so in the above example that would be another $7,500 (totalling $15k).
To access the super for the first home deposit your child must be over 18 and never owned a property before. Importantly you must have applied to access your first home owner superannuation scheme no more than 14 days after you sign the contract to purchase the first home. And you must purchase a home no more than 12 months after accessing the monies.
Another benefit of the First Home-Owner Super Saver Scheme is that the child has clear title to the superannuation monies. As conflict in a family is common this can hopefully give a child clarity on how they have been assisted over the years.
If you use the first home owner super saver scheme to help your children – you can also structure a valuable conversations as a way to financially educate your children in family business.
The strategies around helping your children buy their first home vary greatly from family to family. And giving safe housing is a common goal for most family owned business owners – so understanding the different tax strategies and business strategies to help your long term goals is always a tailored solution. As Westcourt was created from a family owned business, and as we have only one focus in our service offering – we a natural choice for the tax strategy and business succession strategy is structuring your investments and business assets – so why not give us a call?