Can I contribute money to my child's superannuation and claim it as a tax deduction? November 7th, 2023
I have heard you speak recently about how young people can contribute money to superannuation and claim it as a tax deduction.
A few years ago, my accountant set up a family trust and many of our investments are held in this trust. The list of beneficiaries includes my children, who are now adults and their children. My children’s own income means it is no longer viable to distribute income to them because they earn too much. I am wondering if I could distribute income to my grandchildren instead and then, they could contribute the money to superannuation and claim it as a tax deduction?
Can I get my question answered?
The strategy was based on the carry-over provisions of unused superannuation concessional contribution caps where unused carry-over amounts essentially accumulate from birth. That means that after five years, a child would currently have an entitlement to contribute up to $132,500 as a tax-deductible concessional contribution to super. The principle behind carry forward and the rules are explained in Netplan Session 4
In an effort to reduce tax avoidance by distributing income to children under 18 years of age (called minors), minors can only earn $416 per annum tax free from passive income sources which would include distributions from a discretionary family trust. Income above this threshold, is effectively taxed at the highest marginal tax rate of 45 percent.
There are no restrictions on opening a super fund for a child. To avoid unnecessary taxes, you or more appropriately the children’s parents, should obtain a tax file number for the child to simplify the process.
You should also check with the super fund you intend to use, because not all super funds will open child superannuation accounts.
Your grandchildren can make non-concessional contributions to their accounts up to the non-concessional cap of $110,000 per annum and make use of the bring-forward rules, potentially allowing a contribution of up to $330,000.
Concessional or tax deductible contributions for a minor are generally not tax deductible when all the income received by the child is passive. There are exceptions and the obvious one is when the child reaches 18 years of age. Under 18 years of age, the child must derive income from self employment or according to the legislation; “attributable to activities or circumstances that result in them being treated as an employee for Superannuation Guarantee purposes”.
In a nut-shell, you would need to wait until your grandchildren get a job, before pursuing this strategy. While setting your grandchildren up for retirement is one benefit, don’t underestimate the other potential short-term uses.
Your grandchildren could make use of the First Home Super Saver Scheme. This scheme allows them to contribute up to $15,000 per annum to super to a grand total of $50,000. They could then access this money plus deemed earnings, to be used as a deposit on their first home.
Netplan Premium subscribers have access to material that explains how to make use of the First Home Super Saver Scheme.