“I got lucky and sold all my investments at the top of the market in late 2019. Now I am sitting on cash and wondering what to do with it. I have 15 years until retirement and would be prepared to non-concessionally contribute to topping up my super although I have a very healthy balance already. I would also like to gift a substantial amount of the balance to my two teenage children. I was considering encouraging them to invest through one of the robo-digital investing tools available online to take advantage of these depressed share prices, and also so they could build a nest egg to purchase an apartment in the next 10 years. However, I am also weighing up whether it would be better to purchase an investment property now given the likely impact on property values from COVID-19. What is your advice on gifting in general, and these proposed alternatives for the funds?”
Nic – Surry Hills, NSW
Answer
Thanks for your question Nic.
Without knowing more about who you are, what your financial position is, how old your teenage kids are (IE: ‘teenage’ can mean both minor 13 – 17 or adult 18 – 19), it is not possible to be specific without providing personal advice to you, but I can make some observations that may help.
Regarding the gift, it sounds like your main motivation is to give your kids the opportunity to buy a property in the next 10 years. This is an amazing gesture and your kids are lucky to have you, but gifting them the money sooner may not be the best idea.
There are several concerns I have with this, with the three most significant being:
- Tax
- Security
- Eligibility to potential government support
Tax:
Minors are taxed differently to adults and therefore any investment earnings made on the funds they invest, could be taxed higher than they would be if you invested first in your own name or a structure that you control.
Not only could there be higher tax to pay, but it could mean you need to lodge a tax return for your child if they earn more than $416, making it a more onerous and potentially more expensive exercise.
Security:
Once you have gifted the money, the funds are accessible for the kids to do with what they wish. While you may trust that they will use it for the purpose you intend, you are also leaving yourself open to being disappointed. Keep in mind that while you may be right in assuming that your child would not want to disappoint you by spending it on something else, young adults are more susceptible to be influenced by friends or partners. Also, this becomes an asset that could become accessible to a potential future relationship break down or creditor if they were to get into credit card debt for example, that they struggle to repay.
The other part of the security equation is your own security. While you feel financially confident to gift the money to them now, there may be a range of events that impact this for you over the next 15 years until you retire and with this in mind, I would generally advise that you plan for the best and the worst. What this means in practice is that you invest the money in your name or a different appropriate structure with the money earmarked for your kids, but with the flexibility to use as your situation dictates at the time.
Government support:
Simply giving them funds could impact a variety of government benefits that you don’t know if they’ll need in future.
What to invest in?
The answer to this part of your question depends in large part on how much you have as a starting point, but I’ll make the assumption you have enough to use as a deposit for a property as you’ve implied. The three options therefore you’ve presented for consideration include:
- Super
- Shares
- Property
Super
The first important point to discern with super is that super is simply a tax structure, not the investment itself. What this means is that you can invest in shares and property within the super structure if you wish and there is a compelling reason to do this, being that super is typically the most tax effective place to invest money and it should always be considered in the mix. This is even considerate of the fact you already have a healthy balance. A key question for you to consider is whether there is any chance you will need the money before you retire, as the trade off with super is that you cannot access it until you meet a condition of release, which for most Australians is retirement.
Shares
The share market is at an interesting inflection point at the moment and while one fact is that many shares are worth less than they were in February. There has already been a strong recovery we’ve seen since the low point on March 23rd but considerable uncertainty remains. One impact of COVID-19 is that companies are being affected differently. Some are surviving and even thriving and others are flailing or even failing. For this reason, we would advocate that it is a time where active investment management has a lot of opportunities to outperform a passive approach, which is one reason why I would be cautious about a robo solution.
With this said, your investment time frame of 10 years should reward you overtime for making a diversified investment into the share market. If you do choose to invest in the share market, I would suggest you consider staggering your investment over a matter of months. This strategy is called ‘dollar cost averaging’ and takes out some of the risk in trying to pick the right time to invest.
Property
Now is a time to exercise caution investing in the property market also. Especially apartments. There are several reasons for this, but two of the main ones include the recession we are in and the reduction in immigration levels. The current recession will naturally result in some people losing their jobs and with it, ability to repay their mortgage, increasing supply and reducing demand. This combined with the unique impact COVID-19 is having on our boarders and in turn immigration levels will result in another reduction in demand.
On the positive side, interest rates are at all-time lows and the RBA has indicated they will remain so for the foreseeable future, which should provide a cushion for the market. Also, the government has already put in place spending packages to support the sector and there is talk of further supportive measures too. This coupled with Australia’s love for property as an investment, and the fact that land scarcity is compounding in many of our major capital cities and towns over time, is likely to mean that a well selected property over a 10 year time frame will achieve a respectable return. With this said, given the relative lack of flexibility and liquidity of property, it sounds like it may not be the best solution for what you are trying to achieve.
If you have thought about gifting money to teenage children or are just interested in having your financial plan reviewed, or would like to get one going, please contact us.
