Managing a Lump Sum: Tax Minimisation and Investment

A stylized fantasy mythical australian dollar money tree on a green lawn and blue sky backgroud

Money doesn’t grow on trees, but, on some occasions, it may appear to come out of nowhere. Whether it’s in the form of a large payment from an employer, inheritance, an insurance payout, or from another source, lump sum receipts do occasionally happen.

So what are the tax implications here? How can you make sure you pay only the minimum tax due on your receipt?

Tax Minimisation on Lump Sum Receipts

Employee Lump Payment
First of all, if the lump sum is from a retirement fund or is as a result of redundancy, you need not worry, as this is not taxed. However, if you are still in employment – for example, if the lump sum relates to unused holiday allowance for a job you are still in – this will be taxed according to ATO specifications. If you are nearing retirement age it may be possible to defer the payment until that time.

Foreign Super Fund
Australian workers returning from overseas may find themselves receiving a large payout from a foreign super fund. If you are in this situation, it is important to act fast. Such payouts can be tax-free, provided that they are received within six months of your resuming resident status in Australia and that the funds relate to a period of time when you were not a resident in Australia.

Inheritance or Gift
For lump sums from inheritance or gift receipts, there is no tax to pay. However, this does not apply to superannuation death benefit payments in relation to the death of anyone who is not your spouse. In these cases, the tax is usually paid by the estate before the money is divided among recipients.

Investing Your Lump Sum
As receiving a large cash lump sum is not a regular occurrence in the lives of most of us, it can be difficult to know what to do with it. When deciding on where to invest, look for shares in companies who pay franked dividends. This means that the money received from the investment will not be taxed twice, maximising the benefit the investor receives.

For more adventurous investors, using some of the money to gain the services of a reputable advisor is a wise move. The advisor can then guide you as you safeguard your assets with investments across a diverse range of stock.

However, it is also important not to neglect any existing debts you have. Clearing loans, credit card bills and mortgages before moving into active investment is always a solid course of action, giving you a reliable, debt-free base upon which to build.

General advice warning Any advice contained in this article is of a general nature only and does not take into account the objectives, financial situation or needs of any particular person. Therefore, before making any decision, you should consider the appropriateness of the advice with regard to those matters and consult your accountant or financial planner.