The Great Australia Wealth Transfer

Unknown · 00:00:00Jason: Welcome to another episode of The Numbers Game. I'm Jace, I'm here with Nick. How are you mate,

Unknown · 00:00:04Nick: mate? Going well, going well. Just looking forward to another Ripper episode.

Unknown · 00:00:09Jason: Yes, I'm, uh, very with you. Very excited too, mate. I think, uh, this particular topic, uh, I'm, I'm actually just wrapped for you to rip into it. What have you got for us?

Unknown · 00:00:19Nick: Well, we're gonna talk about the Great Australian Wealth Transfer. And depending on what you're reading out there, do you have any idea of what kind of money's gonna change hands in the next I know however many years I, I generations to generations,

Unknown · 00:00:31Jason: I undercooked it. Yeah. I'm, I'm gonna give you a number. I thought it was around $3 trillion was the number that was being thrown around that, uh, is about to exchange hands. And, you know, we've talked about the silver tsunami and the, you know, the amount of people retiring, so. I, uh, I'm happy to be proven wrong if it's not 3 trillion.

Unknown · 00:00:48Nick: Well, I don't think there's an exact number, right. Because they're not counting it every day. Uh, I've heard anywhere from four to 5.4 trillion is the amount and growing. Wow. As you can understand. 'cause things go up in value.

Unknown · 00:01:02Jason: Yes.

Unknown · 00:01:02Nick: So the thing it's

Unknown · 00:01:03Jason: huge.

Unknown · 00:01:04Nick: Yeah. And the thing I really want to, um, double down on today is this perception that, oh, that's, that's not me. That's, that's, that's for the wealthy, you know, the wealthy that are transferring, you know, generational wealth, um, need to minimize their tax. It's, it's not about that. It's, it's for everyone who's got a, a parent, um, or a grandparent

Unknown · 00:01:27Jason: mm-hmm.

Unknown · 00:01:28Nick: Who owns a property, who has money in super. All that stuff can be exposed to tax. Like you think about the average, um, homeowner in Melbourne now, if they've got a big family home and they're in their sixties or seventies. There's, there's, you know, it's not crazy to think it's worth 2 million plus. So that's a big asset that is gonna transfer, and that is an asset that's captured in that amount of four to 5.4 trillion. Um, so it can be anyone, it can be you and me. It can be our parents, it can be our grandparents. It's not just the wealthy who can be exposed.

Unknown · 00:02:00Jason: Yep. It's probably, I mean, in the line of work that we're in, it's probably something that I, I, we, I guess we're fortunate enough to see, so we do think about it, but I think for most people, unless like it's. There's been some life changing event. They've lost a loved one up the food up, up the family tree. It's probably something that goes a little bit unthought of like, what, what will happen when you receive that money? Or what happens when mom or dad or grandparents pass away? If you are fortunate enough to still have all those loved ones in your life, that's great. And I also think it's almost, not, not taboo, but sometimes you don't wanna have those conversations about what happens when someone passes away. Like you might, you might assume that the money's coming to you. Um, but these now are things. Are becoming more, more, I guess, uh, more common conversations amongst, I guess, our age as we grow up.

Unknown · 00:02:47Nick: Yeah. And, and, and look, what I can tell you from working in a financial planning business, these conversations are generally not driven by the dependence or the beneficiaries of that wealth or inheritance.

Unknown · 00:02:58Jason: Mm-hmm.

Unknown · 00:02:59Nick: Nowadays. Uh, it's becoming more common to have a financial planner.

Unknown · 00:03:03Jason: Yep.

Unknown · 00:03:04Nick: So these conversations are getting driven, um, by the, the homeowners or the, uh, the people that are, um, that are transferring the wealth. Um, because there is more, uh, the, it's more access to information now, so it's becoming more Mm, more commonly, um, known that. We know we don't have an inheritance tax and a lot of times that's, that's the throwaway line. We don't have an inheritance tax in this country.

Unknown · 00:03:29Jason: Yep.

Unknown · 00:03:30Nick: You mentioned for now, so let's maybe deviate and jump into that. What did you mean by that?

Unknown · 00:03:36Jason: I just think, you know where, where we have a trillion dollars in government. Um, and, you know, $50 billion in uncollected taxes from, from small business. I think, you know, the government starts to look at ways that they can recoup some funds and, and fill up their, their deficit. Um, and I think, you know, that they leave no stone unturned in exploring what potential new taxes. I mean, we've talked about some of 'em on the show before, whether it's, you know, the, the spare bedroom tax, um, getting rid of the capital gains tax discount. Div 2 9 6, which is an extra tax on wealthy superannuation funds or funds above $3 million, which, you know, can cover that separate, but I think inheritance tax, where there's, where there's smoke, there's fire, where there's whispers, there's truths. Um, and, and I honestly believe that, um, and the word out there is that there's being modeled, um, at the moment. And I think you've heard something similar. So.

Unknown · 00:04:28Nick: Yeah, so what I read, the Australian in Institute has proposed bringing back inheritance tax estimated, and this is where the problem is. It'll be too good to not do estimating. It could raise $10 billion a year.

Unknown · 00:04:42Jason: Yeah.

Unknown · 00:04:42Nick: Um, no legislation yet, but there's 120 billion in inheritance expected annually by the early 2030s.

Unknown · 00:04:51Jason: Yeah,

Unknown · 00:04:51Nick: so $10 a year, it's, it's too good to not touch. Mm-hmm. And generally when they start modeling things. It's just a matter of time.

Unknown · 00:05:02Jason: Yeah.

Unknown · 00:05:03Nick: So let's rip into it, because again, the perception is that there is no tax and there is no official in inheritance tax, but there are taxes, um, that can be passed on to beneficiaries if, um, if you do receive, um, a inheritance in a particular way. So we've got a, a live example, um, and let's say this lady's name is. Betty, who was an Innovate client, um, you, Betty, 94 years old, so lived a good life. Betty, going really strong. Um, Betty on paper is worth $5.3 million. Good on you, Betty. Pretty good. Yeah. 94 worth 5.3. Betty was smart. Um, she's held chairs for a long time. Given her age, she probably held the ASX 200, all the banks, um, and, and whatnot. She's got some super, she sold her house. So on paper, as I said, she's worth around 5.3 million. Um, and if she passes that 5.3 million without any advice directly to her dependents, she could be, or her dependents could be exposed to around a $300,000 tax bill.

Unknown · 00:06:11Jason: Okay.

Unknown · 00:06:11Nick: Um, any idea why that would be?

Unknown · 00:06:16Jason: Oh. I'm gonna go with, uh, maybe the untaxed element of superannuation.

Unknown · 00:06:22Nick: Very good, very good. That's why people pay you for advice.

Unknown · 00:06:26Jason: Yeah. Yeah.

Unknown · 00:06:27Nick: Um, so, um, so super for out outside of the family, home super is generally the, the biggest asset within most families, particularly if they're, um. If they're a family that has been exposed to super, uh, for a long time, so you know, most of their working life, they've had super contributed, um, from their employer. It generally makes up a massive part of their retire retirement. We've spoken about that. One of the big challenges we've, we have in this business is getting people to spend enough money. What they find is. Um, as they get older, their, their want and their ability to spend money diminishes. So you find people often pass away with decent super funds because the older generation or the generations prior to us, the boomers, um, and even before that are quite frugal because they've been through tough times. So we have a big challenge in getting people to spend money. So passing away with a, with a house or a big super balance is quite common. Most people assume super is tax free. 'cause that's what we all talk about, super being tax free. Now, for the actual individual that owns a super, if they're retired, super is tax free. But with your superannuation fund, it has two components. And you might see this, if you look at your super statement, if you drill down into it enough, it'll have a tax component and non-tax component. So a, a tax component. Means the amount of super, um, that's in there that you have received a tax advantage for. So, you know, if someone comes to you to do their annual tax statement or their tax return and you say, Hey, put 10,000 in super, you'll get a tax deduction for it. That's a tax component. Or your employer puts it in 'cause you haven't paid money on that, or you paid tax on that money. If you are putting in money to super post. Tax. So you've already paid tax on it. So you've earned the money, you've paid your, whatever your percentage is on the dollar, and then you decide to put that money into super. You've already paid tax on that, so it's not taxed. So you've got a tax component and a non-tax component inside of your super fund. It's very important to be aware of what that is, particularly if you are getting close to. Not so much retirement, but you're getting close to, to passing away. Um, so if you pass your super to an adult de uh, an adult child who's, who's not a dependent on you, so someone who's not dependent on you to survive, um, they will get hit with a 17%, um, tax on that taxable component. So. If you have a hundred thousand dollars of, um, taxable component super and you pass that to one of your children who's out doing their own thing, earning a living, there'll be a 17% tax on that. So call that $17,000. Um, so in Betty's case, a hundred thousand dollars based on her fund. Now, we haven't got the breakdown exactly what it was, but it would've been a hundred thousand dollars tax to her if she had a passed that. To her, to her kids. How did we fix that for Betty? Any ideas?

Unknown · 00:09:28Jason: Releasing it tax free to her?

Unknown · 00:09:30Nick: Correct. So good

Unknown · 00:09:31Jason: guess

Unknown · 00:09:32Nick: once you hit, um. Once you hit preservation age, or you can move your tax into pension phase, which means you can pull it out with, um, at any rate you want. You can pull it out at 50 bucks a week, or you can, you can download it all in one day, dump it out in one day if you want. So for Betty, um, we a full pension withdrawal. So hypothetically she had a million dollars in there. We put a million dollars out of her super, we put that in a bank account, which means there is now no, um, untaxed component in super that's gonna get passed to her children. Now, most people do not understand that. The other thing I'll add to that is, and, and we have spoken about this. Briefly on the episode when Luke Mac in, I believe, but there's re you have the ability to, to re-contribute so you can pull that money out if it's, um, a, a tax component as the actual individual who owns a super fund. And then you can put the money back in as a, um. Well tax free component. So often when we have people that are getting ready to, um, pass money on, we can actually dwindle down that taxable component over years by pulling it out and putting back in. Sounds too good to be true. It's a, it's definitely a method that you can use and something that's allowed

Unknown · 00:10:52Jason: the old, uh, John Howard transition to retirement, is that where that all

Unknown · 00:10:55Nick: came in? Um, similar, yeah. Similar, yeah. Well, TTRI guess was more about allowing you to continue to work Yeah. Whilst you did pull money out.

Unknown · 00:11:04Jason: Gotcha.

Unknown · 00:11:04Nick: Um, but really all you're doing is pulling money out, um, and putting it back in. But when you put it back in, it's put in as a not taxable. So. In, in, in a lot of cases. 'cause there's rules about, uh, how much you can put that put back in. But in a lot of cases you can't completely wipe that taxable component. But what you can do is you can diminish it over time. Yeah. Um, and decrease the tax burden on your beneficiaries. So. Bit of

Unknown · 00:11:30Jason: forward planning worth a hundred grand.

Unknown · 00:11:33Nick: Wow. It's to stay the family you can save. Yeah. Because if you're sitting there and, um, you're thinking, geez, my parents have got a lot of money in super. Or if you're sitting there as someone who's gonna pass money on thinking, I've gotta be, I've gonna, I'm gonna have a lot of money to pass on in super. I can guarantee you they won't be thinking about the taxable and non-taxable component. And they won't be thinking about how that impacts the beneficiaries that they're gonna pass the money onto.

Unknown · 00:11:56Jason: Probably sounded like a foreign concept. When you said if you looked at your super fund and looked at the details where it says taxed and untaxed, there's probably a lot of people out there that don't look at their super fund statement at all. Yep.

Unknown · 00:12:07Nick: What's another way? So Betty has a massive share portfolio. Yeah. That,

Unknown · 00:12:12Jason: that was uh, definitely the other one that the accountant thinks of is capital gains tax.

Unknown · 00:12:15Nick: Correct. So what would generally happen is. Most people would think, well, I need to hold those shares as long as I can. And what I'm going to do is when those shares, um. Uh, when I pass away, I'm gonna pass those shares onto my beneficiaries. So a couple of things to think about there. In most cases, your beneficiaries will sell the shares, um, because they'll want access to the cash. If you pass it on to your 35-year-old grandchild who's got two kids at private school and trying to pay a mortgage off, they're selling those shares. So if you do sell those shares, you can probably talk to this a little bit better than I do. But if those shares get passed or those shares get sold down in one lump sum and passed on, there's a capital gain impact. Maybe talk us through that.

Unknown · 00:13:02Jason: Yep. Yeah, definitely. So the, the original cost base becomes where the capital gains tax is calculated from. So, um, as long as Betty was buying them after 1985, which, uh, essentially where capital gains tax came in, I think it was like the 19th of September or some kind of. Fringe weird date.

Unknown · 00:13:18Nick: Yep.

Unknown · 00:13:19Jason: Um, but essentially that, so when it passes over, you get the original cost base of those shares. Um, you'll have to pay capital gains tax, um, you know, from the purchase price to the sale price. Um, so it can be quite a big bill for people to, to pick up. Yep. Um, is, that's if it wasn't handled within the estate first.

Unknown · 00:13:34Nick: Yep. So what we did with Betty and forward planning, 'cause remember, Betty's still alive. And she's dealing with us now because she wants to plan. Um, so with Betty, the plan was to sell those shares down gradually, so sell the shares down gradually. So you're selling them in different financial years, so you're minimizing your tax. Um, each of those years we were gifting 150,000, which you can do to each of her daughters. And her daughters were maximizing their super contributions. So you think about, um, you think about the people we're dealing with. That are receiving the inheritance. It's generally people that are close to retirement because it's their parents.

Unknown · 00:14:12Jason: Yeah.

Unknown · 00:14:13Nick: In their nineties. So you're talking about 60 and 70 year olds who are dealing with, um, inheritance and they've generally at the same time are trying to boost their super.

Unknown · 00:14:22Jason: What a smart strategy though that putting it into super, oh God,

Unknown · 00:14:25Nick: a hundred put into super gift 150,000. So from, for, for Betty by staging, um, her. Share, sell down over three years, we reduced our capital gain bill expected from 200 K down to down to 45 KA year.

Unknown · 00:14:41Jason: Yeah.

Unknown · 00:14:42Nick: So,

Unknown · 00:14:42Jason: and if those children had carry forward concessional cap, all of a sudden the tax deduction and the refund back the other way.

Unknown · 00:14:48Nick: Yeah.

Unknown · 00:14:49Jason: Everyone's winning a

Unknown · 00:14:50Nick: hundred percent. So, you know, there's a 55 grand saving just by staging the sell down and. If you look at what the share market's done the last few years prior to what's happened recently with, with, with the War, also upside, um, 'cause she did manage to keep a big chunk of her shares. Probably the last thing to think about is property and it's, it's pretty rare that you see an owner occupied home past the dependency. You obviously, people get older, they downsize or they go into homes, but there are cases where people do live out there, their days in the owner occupied home. So it's important to understand if that's gonna have an impact as well.

Unknown · 00:15:27Jason: That'll be my old fella.

Unknown · 00:15:28Nick: Yeah.

Unknown · 00:15:28Jason: He said he was never getting him outta there. Got outta of me. Yep. Correct.

Unknown · 00:15:31Nick: Um, so look, if it's an owner occupied home. Um, it's not subject to capital gains know as, as long as you sell it within a two year period.

Unknown · 00:15:41Jason: Yep. Correct. Sell within a two year period.

Unknown · 00:15:42Nick: Yep.

Unknown · 00:15:43Jason: Yep.

Unknown · 00:15:43Nick: If you decide to keep that property and for it to become a, an investment property of your own, which would expose it to capital gains.

Unknown · 00:15:49Jason: Yep.

Unknown · 00:15:50Nick: They will look at the market value of the property the day it was, um,

Unknown · 00:15:53Jason: date of death.

Unknown · 00:15:53Nick: Date of

Unknown · 00:15:54Jason: death, date of death. You, the child gets the market value of the property. That becomes their cost base.

Unknown · 00:15:58Nick: Yeah. Perfect. The big thing is, and this is where people would get caught out, because you often see. Individuals or couples building an investment portfolio, you ask the question, why are you doing that? An investment property portfolio, we wanna leave it to our kids Now that's awesome and I think a lot of kids would be in a great position if they got properties left to them, but they need to understand what that actually means from a tax point of view. So quite often, if you. See a client leave properties to kids, they're sold straight away. They're sold straight away because the kids have got other, other intentions and other goals and what their parents might have had. Now, mind you, that property still puts 'em on a really good path, but generally the kids won't want to retain a property portfolio. We see that a lot. Do

Unknown · 00:16:47Jason:

Unknown · 00:16:48Nick: you think that's.

Unknown · 00:16:49Jason: Isn't, that's a mistake to overlook.

Unknown · 00:16:50Nick: That Overlook from the parents?

Unknown · 00:16:53Jason: Yes. No, for the children to be able to keep the property, you know, no transaction cost to get in or out.

Unknown · 00:16:58Nick: Yeah. Look, it's, but here's the thing. It, um, I'll give you an example. Uh, it could be you've got an investment property that your parents handed to you in Queensland that's done really well. Um, you are trying to get on the property ladder. You've got two kids that you wanna put to a school in a certain area. Whatcha gonna do, you're gonna sell that property, you're gonna buy the house you need to live in. So it's very, I think it would be rare that, that people keep properties that were inherited for a long time. So the tax implications there, if the property was purchased, uh, post 1985, which in most cases it would be, they were building investment property portfolio, it's important to note if you do sell that as a, uh, beneficiary. Whether you sell it in four years time or six years time, the, the cost base of that property will be backdated and, uh, from when your parents bought that.

Unknown · 00:17:51Jason: That's only if it was an investment property. Yes. If

Unknown · 00:17:52Nick: it's an investment property, yeah.

Unknown · 00:17:53Jason: Correct. Investment property, yeah. You're going back to the date that your parents bought it.

Unknown · 00:17:57Nick: Yeah.

Unknown · 00:17:58Jason: Um, then that's the difference with the main residence, which is why we've. We've seen clients of ours get that wrong when they didn't come and seek advice from professionals. They inherited the home and they quickly sold it. This is the main residence thinking that they were gonna have to pay tax from the dawn of time when the main residence was bought. So if I use my old man's place an example, they, I think they got it for like $40,000. Yeah. In Endeavor Hills back in the day, probably worth a million at least. Give or take. Yeah. Now, if that was the understanding, my brother and I would be like, boom, let's sell it. We don't wanna pay tax on 40 grand or million.

Unknown · 00:18:31Nick: Yeah.

Unknown · 00:18:31Jason: But because it's his main residence, we would get the market value at date of death. Yeah. We'd have a million dollar cost base. We could hold onto it for a few more years. Yeah. And even if we don't sell it within two years, we keep it for four. Yeah. Let's say it goes to 1.4 million. Yeah. We get the 50% CGT discount. Yeah. And then my brother and I would split the tax.

Unknown · 00:18:49Nick: Yep.

Unknown · 00:18:49Jason: That's on the main residence. For the investment property example though, it's the original cost base. And let me, that is where it gets more meaty in tax land.

Unknown · 00:18:58Nick: Well, you, and this is why conversations have to happen and you need to understand what is the desire of the beneficiaries. So let me give you an example and you'll love this 'cause you're a tax man excited. I'm, I'm retired, um, and I'm, I'm not far away from passing away. I've got a health issue. So I'm gonna leave property to my, to my daughter, hypothetically. My daughter's a hotshot lawyer earning 400 grand a year on the tax top tax rate. So I'm a couple years away from, um, from passing away. I know that, 'cause I've got a, I've got a timeline. Um, I'm sick, I've got cancer, whatever. So if I don't understand my daughter's intentions. My daughter says in her own mind, if I get that property, I'm gonna sell it.

Unknown · 00:19:45Jason: Yep.

Unknown · 00:19:47Nick: I've had that property since 1990, so you know, 20, whatever, however many years ago that is. 36 years ago, if my daughter sells that property experiences a capital gain, her income is already 400 K. She's already on the top tax bracket.

Unknown · 00:20:02Jason: That's a lot of tax.

Unknown · 00:20:03Nick: That capital gain is gonna go straight on top, which means she's gonna be at the top tax rate on all of that gain. Now, if I hadn't known that. As someone who's gonna pass that property onto my daughter, I'm earning no income.

Unknown · 00:20:16Jason: You're moving

Unknown · 00:20:17Nick: into because, because I'm retired, I could, there's, there's things I could do to minimize that tax. I might just sell that property myself and cop the capital gain. I'm in the lower tax rate, so a big chunk of that's gonna be tax at a much lower rate than what my daughter would've paid. And then I've got other means to then leave that to my daughter outside of giving her the property and she's gotta deal with the capital gain. So, and there'd be, there's probably 10 examples like that. All I'm trying to demonstrate is the, the need to get advice and understand it and probably the need to talk to your beneficiaries about what they want. Not so much of builder three property portfolio. Of course, they want it. Why wouldn't they want it? Yeah, they're great properties. So, uh, it's, there is, there is tax to be paid when assets get. Distributed or assets get left, um, to dependence. There is no inheritance tax officially, but the government still does pick up some money along the way and there are a few little call them loopholes that you can use, really good strategies to minimize that. In most cases. It's hard to eliminate it if you leave an investment property to your daughter or your son and they, and they decide to keep it. There's a capital gains tax. Yep. But could you view have saved a little bit if you knew they were going to, um. To sell it anyway if you had to sold it and give them money in another way.

Unknown · 00:21:33Jason: A lot of people assume retirement eliminates all taxes. Yeah. Um, you know, as well as passing things on from an inheritance point of view, even though there is no inheritance tax. Yeah. But yeah, as you've highlighted, there's a couple of examples there, whether it's CGT on shares. Also the tax or untaxed element of super funds. Um, you know, you, you're gonna get little chunks getting taken here, there and everywhere. And that could affect, you know, this big wealth transfer we're talking about.

Unknown · 00:21:56Nick: Yep.

Unknown · 00:21:57Jason: If we're letting that get kind of diminished and chewed away by not having a smart plan, you know, we're, we're really not planning for the future properly.

Unknown · 00:22:04Nick: Yep. A hundred percent. And the, the other thing I didn't mention too, we're talking about the. Re-contribution strategies. So from next financial year onwards, you convert up to 390,000 of your taxable super into tax free super every three years. So, uh, you can do that until you're 75 years old. So if you think about that 390,000 over three years, that's a pretty significant amount for most people retiring at this. Point in time, you know, 2026 is when we're recording this. That will be a big chunk of their super. So again, it's just being aware of what's available because most people on the street would not know the difference between taxed and not and untaxed super. So yeah, it's a big number. It's climbing, as I said, it's depending on where you read and what you listen to, it's 5.4 trillion that's going to convert. Um. If it's 5.4 trillion now, it's gonna continue to grow. The, the A TO is looking at it, they see it as a massive opportunity. Um. I personally don't mind. Inheritant ta inheritance tax. Well, maybe we'll leave that for a, for another episode, but, um, I don't mind it to some degree. Maybe we could unpack that.

Unknown · 00:23:22Jason: I was gonna say, we, we don't wanna lose all of our listeners, Nick. Uh, so, you know, to be continued that conversation, I think

Unknown · 00:23:26Nick: too. Well, here's the thing, we're all gonna get taxed some way for them to get what they need. So it's just a matter of. Breaking that up in, in a way that makes sense the most because whatever they don't tax from inheritance tax, they're gonna take from us in other ways, whether it's income or GST or whatever it is. So I don't mind it to some degree. Um, but I think if you are, you've got an aging parent that's got a bit of money that's done well, um, or has simply got a, a big house with no debt and a decent amount of shares or super, you should definitely be getting in front of a financial planner. Mm-hmm. Just to understand what options are available. And you should definitely be talking to your aging parent about that. Don't be, don't feel bad in bringing it up. Um, because at the end of the day, they will want you to bring it up. And most of the people we see now are coming to us. Not so much the beneficiaries, but um, the people that are gonna leave some money. Uh, and that's it, mate.

Unknown · 00:24:24Jason: Yeah, mate. I think that's absolutely prudent and fantastic advice is to not shy away from these conversations because it's these conversations that could have incredible outcomes if they're structured right. In the example of Betty, well, under Betty and the family, um, you know, as they say, most people will receive wealth, but fuel will know how to keep it. Game over. This podcast is for educational and informational purposes only. The conversations are of a general nature and do not qualify as financial or tax advice. We recommend before you make any financial decisions, you consult a licensed professional. Individuals on the podcast may hold positions in the company's discussed. ---