Making Super Contributions for Your Children or Grandchildren

By Paul Nicol

Child or grandchild superannuation contributions strategies are becoming more popular for a variety of reasons, including;

• Building your child or grandchild’s super earlier to help compound the super balance more quickly
• Accessing government payments to grow your child or grandchild’s super
• For a child or grandchild’s tax benefit
• A form of early inheritance

Children under 18

Super contribution strategies for children under 18 are often dismissed due to the long period before the funds can be accessed. Still, we see some compelling reasons parents or grandparents with excess savings willing to gift money to a child should consider them.

Superannuation regulations permit a superannuation fund to accept contributions for children under 18 without restriction, regardless of their employment status. In practice, however, many funds impose restrictions on minors opening superannuation accounts because minors lack contractual capacity unless there is an employment arrangement.

A super fund treats contributions made by anyone other than the child or their employer as non-concessional contributions. The contributor cannot claim a tax deduction or offset for the contribution.

Contributions made on behalf of a child count towards the child’s contribution limits.

A child can qualify for a government co-contribution payment of up to $500, but they must jump through a few hoops first.

To begin with, the child will need to make a personal super contribution to their super fund. It must be their contribution (and not a contribution from a third party). This means the source of the funds must come from the child’s after-tax savings. Therefore, under this scenario, a child might be gifted money from a parent or grandparent from which the child can then make the super contribution. The parent or grandparent shouldn’t bypass the child and deposit their gift directly into the child’s super fund.

The maximum co-contribution payable for the current financial year is $500. With a matching rate of 50%, a personal super contribution of $1,000 would maximise the co-contribution available, provided the individual’s “total income” does not exceed $41,112.

It goes without saying that the earlier you start with superannuation savings, the better. Boosting a child or grandchild’s super benefits with a small amount now will provide an opportunity to encourage and educate the next generation about their retirement savings and the magic of compounding investment returns.

Let’s use a hypothetical example. Isaac is 18 and about to start his first part-time job. He will earn an average of $500 per week until age 25. We have assumed a superannuation guarantee rate of 12% for simplicity and that his superannuation produces a return of 8.5% p.a.

How do the value of the contributions made between the ages of 18 & 25 change with the addition of a personal super contribution of $1,000 (and the co-contribution)?

The superannuation guarantee contributions made grow to be worth almost $590,000 by age 60. Adding the personal super contribution of $1,000 (and the co-contribution), only $8,000 in additional contributions grows the amount to $870,000, an increase of almost 50%!

Children over 18

For children or grandchildren over 18, there are many different views on whether parents with money available to help their children should do so, with concerns about the potential for the children to become spendthrifts with the funds provided.

Putting money into super for your children or grandchildren can alleviate the fears of wasted money, as it is preserved in the super environment until at least age 60.

The strategies for children under 18 stated earlier in this article also apply to children over 18—additional strategies for contributing to children or grandchildren over 18 warrant serious consideration.

Many parents or grandparents are helping their child or grandchild make a concessional (tax-deductible) contribution into super.

People over 18 can make personal concessional (tax­deductible) contributions if they earn income from employment or business.

The major benefit of making tax-deductible superannuation contributions is the compounding effect of paying a lower tax rate. A simple example can show this:

Chad is 45 years old and earns $165,000 a year. His employer contributes the minimum required superannuation guarantee (SGC) of 11.5% or $18,975. Including the SGC, Chad is entitled to make a deductible contribution of up to $30,000 but does not have the financial resources to use his total limit due to his mortgage and children’s school fees.

Chad expects to retire at age 65. His parents would like to help Chad build some wealth in a tax–effective way. Note that:

• Chad’s marginal tax rate is 37% above $135,000%
• Concessional (Tax Deductible) Contributions to super are taxed at 15%

In simple terms, if Chad’s parents help, he will save 22% on his tax, which, at $10,000, is an immediate benefit of $2,200. Chad receives this benefit as a refund on his tax return.

This concessional contribution strategy is also possible for adult children who may receive trust distributions from wealthy families to reduce tax on these distributions.

Making a non-concessional (after–tax) super contribution is also possible. We see this strategy adopted by parents with adult children not far from contemplating retirement.

For example, a parent who is 75 with children who are 50 may take the opportunity to add to their child’s super progressively, knowing that they may otherwise be left with considerable funds outside superannuation when they receive an inheritance.

Maximising the benefits of superannuation with lowered contribution caps is becoming increasingly difficult. This strategy is appealing as wealthy parents may decide, in the form of early inheritance, to make significant non-concessional contributions into super, subject to a contribution limit of $120,000 or the 3–year bring–forward limit of $360,000. If this gift comes from the parent’s superannuation, this may also save further tax on the parent’s death.

It is important to reinforce that the child must make all the contribution strategies alluded to. In other words, the parent would need to deposit the money in the child’s bank account, and the child would need to contribute.