The Great Australian Wealth Transfer
It’s started. Over the next two decades, baby boomers are set to bequeath around $3.5 trillion, according to The Productivity Commission. This is the most significant intergenerational wealth transfer in Australian history. The question is: have you thought seriously about your part in this?
Baby Boomer Wealth Accumulation
Over the last forty years, boomers have been diligently working away. Meanwhile, one of their main financial assets (the family home) has been appreciating handsomely. In 1982 the median house price in Sydney was just under $80,000. As at March this year, the Sydney median house price is just under $1.6m, according to Domain’s most recent house price report. (https://www.domain.com.au/research/house-price-report/march-2022/). This sounds like a lot, and it is, but it works out to be a compounded average growth rate of about 7.7%.
Over the last thirty years, Australian shares have returned about 9.7%. (If you’re interested in comparing the investment merits of property and shares, see an earlier piece we wrote here: https://cloudbreakwealth.com.au/2019/06/24/property-and-shares-which-is-the-better-investment-or-should-you-own-both/) Considering that over 80% of baby boomers own at least one property, compulsory superannuation contributions have been going for more than thirty years, and there are currently over 5.4 million baby boomers in Australia it’s easy to get a sense of the wealth accumulation. That’s just two asset classes. Then consider other investments, family businesses, savings, etc.
Family businesses account for around 70% of all businesses in Australia. Of those business owners, 41% intend to pass the business to family members. However, letting go of leadership and/or ownership control is a real concern for many business owners. It is important to remember that succession is not retirement, and as with most things in life – the earlier you start the plan, the better. This is going to require open and ongoing communication between the generations. The old saying is ‘rags to rags in three generations’. That is, the first generation builds the wealth, the second holds it, and the third squanders it. With this in mind, it will help to involve the third generation as much as practically possible in the succession discussions and planning. Bear in mind, with the passage of time, that third generation will get bigger and bigger.
One of the more common methods of wealth transfer is through superannuation. Super members need to be aware that when they die, the taxable component of their super balance (which is likely to be a large chunk, if not the entire balance) will be subject to 17% tax when received by the family member. There are strategies that can be utilised to minimise this taxable component.
An alternative to passing the wealth down after death within superannuation is simply to withdraw it from super after meeting a condition of release. This can then be gifted to family members with no adverse tax implications. Fortunately, in Australia we are not subject to inheritance tax, unlike many other countries. For example, Japan has a whopping 55% inheritance tax!
While it is likely the wealth will eventually find its way to the third generation, many retirees wish to pass some of that directly to their grandchildren. This is where investment bonds and education bonds can be advantageous and tax effective. The bond is typically established with the grandparents as the owners and the nominated grandchild as the beneficiary. There can also be an automatic reversion date, upon which the bond passes into the name of the grandchild. Tax on earnings is paid by the product issuer, meaning investors don’t have to declare any income from the bond in their tax return. Education bonds have the added feature that investment earnings can be accessed within the ten years to cover education related expenses, while incurring no tax. There are a range of quality investment options available within the bonds to suit various risk profiles. For more on these instruments, see https://cloudbreakwealth.com.au/2021/09/29/talk-to-me-about-investment-bonds/
Testamentary trusts are common in estate planning, and they have their benefits. Usually, assets handed down to beneficiaries via a testamentary trust will not be subject to CGT upon death of the owner. Were the assets handed down from individual to individual, a CGT event would normally occur, and the estate would incur capital gains tax.
Another benefit is that income received via a testamentary trust in the hands of minors is subject to tax at adult rates, including the larger tax-free threshold. Normally, minors pay 45% tax on any income over $1,307. This can be particularly powerful if the family business is generating excess cashflow and payout out dividends. If left to the children via a testamentary trust, there can be significant tax savings.
Estate planning and succession is a complex subject. Often though, it is not discussed in depth with those who will be affected most. To ensure that family wishes are adhered to, and in the most efficient way possible, there are numerous strategies available. Open dialogue across generations is crucial. It will educate younger generations around both family wishes and strategic decisions. Often it will also give peace of mind to the older generation. Talk early and talk often!
 The Real Story of Housing Prices in Australia from 1970 to 2003 Peter Abelson and Demi Chung, Macquarie University, 2006. https://appliedeconomics.com.au/wp-content/uploads/2021/10/2006-real-story-of-house-prices-australia-1970-2003.pdf
 ABS, 2021 Census Shows Millenials Overtaking Boomers, https://cloudbreakwealth.com.au/2019/06/24/property-and-shares-which-is-the-better-investment-or-should-you-own-both/
 KPMG and Family Business Australia Survey of Family Businesses 2009 (in conjunction with Bond University)
General Advice Warning: Any advice given herein is general in nature and has not taken into consideration your personal financial objectives, situation or specific needs. You should consider the appropriateness of the advice as it relates to you before acting upon it. Always consult the relevant Product Disclosure Statement before making any investment decision relating to a specific product that has been mentioned.