Wise Choices for a Disabled Child’s Future

My spouse and I are both 52 years old. He earns about $53,000 net a year, I earn about $40,000 net. We have a mortgage of $152,000 on a house worth $1.2 million. We are paying extra off the house, $800 a fortnight, to hopefully pay it off by age 56. I have $166,000 in super and my spouse has $90,000.

Our only child is in year 11, in an autism support class. Being 16, she qualified for a Disability Support Pension, which, with an educational supplement payment, means she now has an income of $407 a fortnight, about $11,000 a year, mostly accumulating in her credit union account. My father died in 2004 and left shares in trust for his grandchildren but with the income paid out to my mother. She is 84, in a nursing home and also has substantial share investments.

When she dies, I estimate I would inherit $130,000 and my daughter about $56,000. Our daughter intends to study at TAFE and she hopes to work in her chosen field, which is likely to be low-paid throughout her working life. Once she finishes school, I am hoping to return to full-time work. When the inheritances come through: 1. We could jointly buy a two-bedroom rental property close to public transport. This would cost about $600,000, meaning about $170,000 mortgage for us and $250,000 for our daughter.

While she lives with us, she could use her income plus her half of the rental income of $400-$450 a week, before outgoings, to pay down her mortgage, and she could move into the property later; 2. Our daughter’s inheritance could be invested in the sharemarket, which would yield income and she would not be in debt, but also means she would not own a property, if she ever wanted to move out of our house. Is a joint property investment with the inheritance money realistic and a good idea or is sharemarket investment better for her? C. C.

If you had sufficient assets, then helping your daughter buy a property would be a useful form of assistance, and I take it you believe she is capable of living independently. If that is uncertain, you should consider eventually placing her in a Government-run share house where people with similar levels of autism can live semi-independently.

However, I think the best way you can help your daughter is to have sufficient assets to be able to provide for yourselves and to continue to generously cover her needs as long as your health allows. This implies that your objectives should be to pay off your mortgage as rapidly as possible and then direct that money, and more if possible, into super so you can continue to afford to care for her in your retirement.

Your inheritance would help make a serious dent in your mortgage. The $800 a fortnight going into the loan is the after-tax amount of $1220 a fortnight (after 34.5 per cent tax) and you could then each salary sacrifice $610 a fortnight into super with no change in total take-home pay.

If you go back to full-time work, try to sacrifice to the concessional cap of $25,000 this year, rising to $35,000 in 2013-14.

You should also investigate the use of a special disability trust in which to leave assets for your daughter in your wills, so that she can continue to maximise a Centrelink pension. For government information, search ”special disability trust” at www.fahcsia.gov.au.

If a grandparent held shares in trust for his grandson (for example grandfather John Smith held shares as trustee for grandson David Smith, aged 7), given that the income would be shown in grandfather John’s tax return, would the investment be taxed at John’s marginal rate of tax or at the rate of tax for those aged under 18 – that is once income exceeds $416 a year, would the tax be at the highest marginal rate? L.C.

It depends on the origin of the money. If granddad bought the shares and simply opened an account in his name on behalf of his grandson (who being under 18 cannot buy shares), then if he distributed the dividends to David, they would be subject to children’s tax rates on amounts above $416 a year. The excess above $416 is taxed at 66 per cent and, for annual income above $1307, the tax is 45 per cent of the total amount.

If granddad retained the dividends, they would be taxed as part of his income since the investment is in his name and subject to his decisions.

On the other hand, if granddad established a family trust, with trust deed and all, then the trust would need to submit a tax return. If the income was distributed, David would again be taxed at children’s rates but, if the income was retained in the trust, it would be taxed at 45 per cent plus Medicare.

David would not be subject to children’s tax if the income was ”excepted income”, which can stem from several sources, such as lottery winnings or an inheritance. For example, if grandma had died and left the money in her will for granddad to invest for grandson David, the distributed income would be taxed at normal rates; that is, the first $18,200 would be untaxed, etc.

The distribution of trust income is one of the most diabolical areas of tax law, so if establishing a discretionary trust that you then elect to make a family trust, be sure to go through an experienced tax agent.

I am eligible for the Seniors and Pensioners Offset and I do my own assessment each year to determine whether I am liable for tax, but this year I have been unable to discover what is the sum I am allowed to earn before tax is payable. I understand a couple can earn up to $28,974, but do not know what figure applies to a single person. O.R.

Single people can claim the full SAPTO of $2230 if they earn less than $32,279 in 2013-14. The offset then phases out at 12.5c for each additional dollar until it reaches zero for income above $50,119.

You are correct in that, for couples, the maximum SAPTO of $1602 is available for incomes below $28,974 each and phasing out at $41,790. Any unused portion of the spouse’s Senior Australian and Pensioner Tax Offset can be transferred to the other spouse.

If you have a question for George Cochrane, send it to Sunday Money, PO Box 3001, Tamarama, NSW, 2026. All questions answered. Help lines: Financial Ombudsman, 1300 780 808; Centrelink pensions, 13 23 00.

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Parents, Families, Children

George Cochrane

The Age

Date published:
Sun 27th Oct, 2013