At some stage, most of us will have dared to dream about winning that large lottery jackpot and considered the life changing financial impact this would have, in reality though windfalls can come in many forms and amounts.
The most common forms of a financial windfall include, an inheritance, a ‘gift’, or a lottery style or other gambling win.
When an expected (or unexpected) windfall is anticipated or received it is important to consider a few key points, these include:
– Who is providing the windfall, and is the recipient specified; this will normally be the case in the event of an inheritance or specific gift
– What type of assets constitute the windfall, is it cash, a property, shares or other assets.
– Are there specified conditions stipulated around the use of the windfall, i.e. restrictions on the sale of a property or shares. This can be the case where an asset, for example a property, is left to more than one individual under a Will or specified gift arrangement.
– Where minors are involved or there are overseas elements, or older (pre-CGT) assets involved, there may be tax implications to consider where the windfall is inheritance related. If this applies, you should discuss with your advisor.
When it comes to using the proceeds of a windfall it is important to consider where funds should be allocated. The list below details some of the more common purposes, bearing in mind that the size of the windfall will determine how many of the below are able to be met:
Pay out debts (starting with the home loan)
There is no tax benefit associated with the debt incurred to purchase your home,and owning this asset outright is normally a priority for most people. The receipt of a windfall may allow this goal to be ticked off immediately.
Use funds to upgrade lifestyle assets
e.g. home, cars or other personal assets – be careful not to over extend, the larger the assets the larger the costs associated with them on an ongoing basis.
Invest for the future
A large windfall may mean that a steady investment plan can be implemented allowing you to diversify your investments across multiple asset classes smoothing the risk and pressure on asset returns. Prudent investors will look to spread their capital across the different investment asset classes, namely shares, property, fixed interest and cash. Where a windfall is larger the opportunities to broaden the investment universe and obtain access to unique tailored investments may exist.
Provide financial support for family and loved ones
Consider who and how much to provide, in the event of cash gifts it is important to consider how these will be taxed by the recipients.
Leave some to charity or other philanthropic pursuits
Many people have a specific cause or causes they are passionate about supporting. Gifting money to a particular cause may also attract tax benefits.
Replace working income and provide for an ‘early’ retirement
Similar to building an investment plan with a more direct focus on replacing the income currently earned through employment.
Depending on your individual situation, contributing funds into the superannuation environment may provide a tax effective investment opportunity with a focus on building your retirement benefits. Before contributing to super though, it is important to consider how the rules around accessing funds and the specific contribution limits may impact your personal situation. For this reason we would recommend speaking to a qualified financial adviser before contributing additional funds into the superannuation environment.
As with anything of a financial nature it is also important to consider the risks of each of the above, in particular from a tax and social security standpoint, of particular importance is to consider the impact a gift, either made or received may have on the ability for some to receive future Centrelink benefits and whether the good intentions of providing a gift to someone may in fact cost more in the long run. Additionally, with larger windfalls there is also the risk of being over generous with family and loved ones to the point where the amount of the windfall is diluted due to mismanagement to a point of being whittled away.
Other than the aforementioned potential tax issues surrounding certain inheritance windfalls, there are no other tax implications of gifts or one off gambling winnings, however taxation should also be considered in respect of the types of investment you are looking at moving forwards. Considering your requirement for income or capital growth will form part of a potential investment strategy review by your financial services advisor. Capital gains are often preferable longer term outcome under current legislation, as owning capital growth assets for in excess of 12 months attracts a 50% discount prior to taxing at your marginal rates. Others however may instead prefer franked investment income to achieve tax refunds at lower income levels.
Please note that the above article is provided as general advice, and should not be relied upon without first consulting your own suitably qualified tax advisor and financial services advisor, to ensure the best course of action is taken to meet your own circumstances. Should you require some more specific advice, please contact www.bellpartners.com.