Peter Johnson, founder of Advisers Digest, told attendees at the SMSF Adviser Technical Strategy Day in Brisbane last week that it is best to only leave a BDBN to children if an individual is genuinely concerned that someone will make a claim on their estate.
“Leaving [superannuation] to your spouse has no [tax] consequences, but what if they die? Who are you going to leave it to?” he asked.
“What if you have a new spouse? Your kids are going to get nothing. Leaving your super to your kids can be a disaster.”
Johnson continued that he often has clients who have made a BDBN to their children and not to their estate because they wanted to make sure there would be no claim on their estate.
However, he said the consequences of that decision meant the children would pay 17 per cent tax instead of 15 per cent.
“That’s an extra 2 per cent that is taxable income to the kids, and that almost always means they did a Division 293 on their superannuation, which they didn’t hold and it will mean they blow their health insurance rebate,” he said.
“And if they’re getting childcare support, they lose that as well. Leave it to the estate. It’s 15 per cent tax. It’s no stress. The estate just puts it in its tax return, pays 15 per cent or could be less, depending on how much income the estate earns for the year, and then it comes out.”
Johnson continued that superannuation is not necessarily the most tax-effective place for building wealth.
“If you’ve got $500,000 in a company, and attached to that is a couple of $100,000 of franking credits, and you’ve got six grandkids, you could put all that money into testamentary trusts and landing each of those kids $20,000 a year,” he said.
“It’s way better than superannuation with some planning. For those who would be paying tax, you probably want to maximise what they have in superannuation and then live off tax-free pensions as much as they can. Then you want to make sure that the kids don’t cop a massive tax bill.”
The SMSF Adviser Technical Strategy Day will move to Melbourne on Tuesday, 22 October and Sydney on Thursday, 24 October. Tickets are still available for these events.
