Nick Bruining Q+A: Passing on those shares to grandkids could actually boost your pension

Twenty-six years ago, I bought a bundle of Telstra shares on behalf of my then-very young grandchildren. To keep things simple, I bought them under my name.

A few weeks ago, one of the grandkids told us that she was about to buy a house. I had mentioned the shares held on their behalf once before, so she may have deliberately dropped a hint!

In any event, I am at a stage in life where I want to simplify things and have decided to transfer all the shares in equal parts to my grandkids, who are now adults. They can decide whether to sell or hang on to them.

How will this affect my tax position and what are the tax ramifications?

Answer

These types of arrangements are quite common. In effect, you created a “bare trust” in 1997 with yourself as the trustee and your grandkids as beneficiaries.

Assuming there was no documentation associated with the trust, the ATO will consider what transactions have taken place over the past 26 years in determining who “wears” the tax liabilities. For example, given the shares have produced dividends over the period, were they paid to you or to a separate bank account which remains untouched?

If it’s the latter, that would demonstrate that it was indeed a trust arrangement and you derived no personal benefit. Similarly, if you did not make use of the franking credits attached to the dividends, it will be reasonably easy to prove it was a trust-type arrangement.

If your answer to both of the above questions is no, it will be difficult to argue it was a trust arrangement. In a worst-case scenario, you will need to declare the disposal of the shares in your tax return, based on the date you effect the transfers and using the closing price on that day.

Even though you receive no money for the gift, it will still trigger a capital gains tax event. Fortunately, because the shares were held for more than 12 months, only half of the profit will be taxable income.

As a senior, if your total taxable income for the year is under $29,783, you won’t pay tax. If we assume that Centrelink already know about the shares, their disposal might actually boost your pension if you are not receiving the full amount.

If your pension is being reduced by the asset test, a $10,000 reduction in your assessable assets could lift your combined pension by $30 a fortnight.

One trick might be to stage the transfers to your grandkids over a few years. That would spread any taxable income over different years and you might avoid paying tax altogether.

Nick Bruining is an independent financial adviser and a member of the Certified Independent Financial Advisers Association