As parents you are often thinking of ways to help your children get a good head start in life.  Whether it is by investing in their education, providing opportunities for sports and other extracurricular activities, or contributing towards a house deposit – it’s about giving your children a leg up when they are just starting out in the hope that they will avoid some of the challenges life will no doubt throw at them.

 

Have you heard or thought of the idea of gifting as a way of helping them?  Gifting is assisting family by giving away some of your assets or accumulated retirements savings.  While it can be of great assistance to them, it may impact on your future benefits and you need to be aware of this.  You may have heard of gifting as a strategy for older people to get access to the pension when they otherwise might not – but is this in fact correct?

Gifting is not only about giving away your savings, but could also be in the form of transferring shares, control of your business, property or even forgiving a loan.  The gift is either for no financial return or for a return that is less that the true market value of the asset.

According to the Department of Human Services it isn’t quite that clear cut.  Gifting can be a viable strategy but there are limits on the size of the gift,  and if you exceed the limit the gift continues to be treated as your asset for a period of time -even when you no longer hold the asset.  This is unlikely to be the outcome you are looking for. 

Selling off your assets at a lower than market price (or at a loss) to fund your day to day living expenses is not gifting – it’s downsizing.  Centrelink assess you as a couple so if you use your funds to contribute to your spouse’s superannuation fund (if they haven’t yet reached their Pension age) that’s not counted as gifting either.

In relation to the Age Pension, Centrelink uses two tests to determine if you fall within the gifting limits:  Singles and couples can gift up to $10,000 per financial year or up to a total of $30,000 over 5 years.  Anything over these limits is treated as a deprived asset and is considered to be an asset under the asset test and deemed under the income test. 

So what is the impact of this on you?  Say for example you wanted to gift your child $40,000 this financial year.  The first $10,000 would fall under the gifting rules but the other $30,000 would be treated as your asset under the Centrelink income and asset means test until 2024. Is this worth it?  Is it possible to gift $10,000 in June and $30,000 in July, effectively reducing the deprived amount to $20,000? There are also loan strategies that might suit your circumstances.

What about the situation where you are not eligible for the Age Pension, are there any tax benefits to gifting to you or your family member?  This can also be confusing.

According to the ATO there is no tax of gifts in Australia. Generally small gifts are not considered income (which is good to know, given the cash birthday gifts you have no doubt provided over the years).  Your family member won’t have to declare the gift as taxable income if: you voluntarily gave it to them to help them out; does not have any connection with any income-producing activity; and comes directly from you.  But your family member needs to be aware that any income they earn on that gift in the future is indeed taxable.  Gifts of larger assets may have capital gains tax implications in some cases.

Gifting can also work in reverse - children wanting to help out parents who may not have sufficient resources to retire on.  A growing trend is children considering buying their parent’s home at below market price and allowing their parents to live in the home rent free.  How does this all fit into the gifting rules given it is well over the threshold?  Or does it in fact sit under the Granny Flat Interest rules, where someone pays for the right to live in a specific home for life.  The Department of Human Services and the ATO have a range of tests that need to be satisfied.

Gifting has to be assessed on a case-to-case basis and you should seek the advice before proceeding down this path. Speak to the friendly team at ActonAdviceGroup for advice you can act on!

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