As the “Bank of Mum and Dad” grows in popularity as a funding source for young adults entering the property market, parents are increasingly looking to their superannuation as a resource. While direct lending from superannuation to children isn’t permitted, once certain conditions of release are met, there are viable ways parents can use their superannuation assets to provide financial support to the next generation.

Here, we explore the financial implications of such support, including tax considerations, superannuation structures, and overall estate planning impact.

Understanding Superannuation Access for Family Assistance

Typically, working parents cannot directly access their superannuation to fund family support. However, after reaching the retirement phase and satisfying a condition of release, they gain more flexibility. At this stage, they may be drawing funds from their superannuation in the form of pension payments, which enables ad-hoc lump sum withdrawals or additional pension payments to provide financial support.

While providing early financial assistance may be attractive, it’s essential to weigh the potential capital gains tax triggered by this kind of early inheritance from a superannuation fund.

Tax Implications and Superannuation Structures

A crucial consideration when drawing on superannuation assets to support family members is the tax consequence of realising these assets. When selling assets from a superannuation fund, any capital gains are subject to tax. For individuals managing a self-managed superannuation fund (SMSF) with both pension and accumulation assets, the structure of the withdrawal becomes significant.

In most cases, it’s preferable to draw a lump sum from the accumulation balance while retaining the pension balance. This approach allows the pension balance to remain tax-free for as long as possible. However, if cash is insufficient, the SMSF may need to sell assets, and the extent of capital gains tax will depend on the balance in the accumulation phase relative to the fund’s total balance.

Early Inheritance and Reducing Future Taxes

Providing financial support through an early inheritance may have potential tax advantages for the next generation. Specifically, by reducing the taxable portion of the superannuation fund, parents might decrease the future inheritance tax burden on their children. An accumulation balance in a superannuation fund usually incurs capital gains tax when liquidated upon the account holder’s passing. Additionally, death benefits tax may apply to taxable portions received by beneficiaries other than a spouse, including adult children.

By drawing down the accumulation balance, which typically has a higher taxable portion, parents might reduce the overall taxable amount in their superannuation, indirectly minimizing the tax burden on their estate’s beneficiaries.

Considering the Longevity of the SMSF and Future Restructuring

As SMSF trustees age, they may need to re-evaluate the longevity and structure of their fund. Facilitating an early inheritance through superannuation could prompt this review earlier, especially if a large asset must be sold to fund the withdrawal. In some cases, parents may choose to shift to an alternative superannuation structure, particularly when nearing a full liquidation of the SMSF.

When planning an early inheritance, it’s wise to consider whether any fund restructuring or liquidation is necessary to optimize the tax effectiveness of the estate and any ongoing financial support to family members.

Estate Planning: Balancing Financial Support and Equitability

Early inheritance may also raise questions of equity among beneficiaries. When providing support to one child, it’s essential to consider both tax consequences and the cost of liquidating superannuation assets. Parents should reflect on whether this net payment—after fees, taxes, and other expenses—should influence their overall estate plan and how best to equalize their estate among all beneficiaries.

Reducing the superannuation balance could have broader implications for estate planning, as it may diminish a tax-effective investment vehicle and increase the overall taxable position of the estate. Parents may find it beneficial to review their estate plan with their financial advisor to ensure that all financial support aligns with their long-term goals.

Keeping Financial and Emotional Goals in Perspective

For many, supporting their children in purchasing a property can be a powerful incentive, particularly with the hope that it will help keep family close by. However, it is vital to carefully weigh both the financial and emotional implications of using superannuation in this way. By consulting a financial advisor, parents can gain clarity on how best to structure an early inheritance from their superannuation, ensuring that it aligns with their tax, estate, and family objectives.

In summary, while accessing superannuation to support the next generation in purchasing property is an option for some parents, it’s a decision that requires a thorough understanding of tax implications, estate impacts, and superannuation fund structures. Careful planning and professional advice can help ensure that any such support is not only effective for the family but also sustainable for the long term.