Do you have, or do any of your friends or family have, a disabled child? Is that parent self-employed? If so, please read on or send this article to your loved one.
Self-employed people can often distribute income to members of their family. By spreading the same amount of income across more than one taxpayer, the total amount of tax paid is reduced. However, distributions can generally only be made to adult members of the family – that is, family members who have turned 18. If distributions are made prior to a child turning 18, these are often subject to the penalty tax arrangements that apply to the only income of minors.
However, disabled children are treated as adults for tax purposes even when they have not yet turned 18. This means that they can receive distributions of net income from family trusts and hybrid trusts. This income is taxed normally, rather than under the penalty tax arrangements that usually apply to the unearned income of minors.
This can save a lot of cash each year for parents, and helps take some of the sting out of the extra costs of disabled kids.
A disabled child can also be superannuated if they are genuinely employed (obviously this depends on the nature of the disability). This is as a general law employee (minimum age rules apply) or as a deemed employee under the special rules applying to company directors (aged 18 and above).
For example, a 19-year-old daughter who is vision impaired might work in the family business during Uni holidays, for which she is paid an arm’s length salary. She can also be superannuated up to $25,000 a year, creating a tax benefit of $7,500 for her family. She can even pay non-concessional contributions of up to $500,000 across her lifetime, and these can also in effect be paid for her by her family. This allows wealth to be moved into the lower-taxed environment of superannuation. Less tax means more money available to enjoy the long-term benefits of compounding investment returns.
These strategies can help create a better financial future for the daughter later in life: SMSFs can pay pension benefits to disabled members under age 55, provided certain conditions are met. Disabled children, especially if the disability is degenerative, often meet these conditions well before the normal retirement age.
It’s remarkable how often advisers sit down with a new client and discover they have, say, a ten-year-old disabled child. If the client is self-employed, that’s usually ten years of unnecessarily high tax bills. We work hard to make sure there are not eight more yet to come.
Any questions? Give us a call. This is one area in which we really love to help.
