The rules of gifting

4 min read

Gifting money to children by giving away some of your assets or retirement savings can be a great way to help, but you should be familiar with the gifting rules before doing so. 

Gifting money to family or friends can provide them with invaluable financial support, especially if they’re working towards a specific goal like a deposit on a new home or saving for children’s school fees.

Gifting can also be a useful strategy to help you offset an asset before you retire. It could potentially increase your Age Pension entitlement and other government benefits provided your gifts remain within certain limits. 

It’s only natural for parents and grandparents to want to help their children or grandchildren, even when they become adults. And it’s no surprise that the biggest financial challenge facing most young people these days is getting a foot onto the property ladder. It’s often down to the so-called Bank of Mum and Dad to help them realise this dream.

In fact, parents are Australia’s fifth-largest lender, having loaned their children just over $92 billion, with the average loan sitting at an astonishing $73,5001 .

So, we’ve put together a quick guide on gifting to help you understand the rules, the risks and the benefits.

What is gifting?

Gifting money is more than just giving away some of your savings. In simple terms, something is considered a gift if some of these conditions apply2.

  • You sell or transfer an income or asset.
  • You get less than its value or nothing in return. 

There are a surprising number of scenarios where gifting rules may apply and it’s easy to be caught out.

  • Selling a property for less than its market value, eg your house is worth $850,000 and you sell it to your child for $500,000.
  • Transferring shares to someone without receiving the full market value in return.
  • Forgiving a loan someone owes you.
  • Giving up control of a trust or company which holds underlying assets that you don’t get the full market value for.
  • Providing money to a family trust or private company you don’t control, without a loan agreement showing the amount to be repaid.
  • Buying a car for your child as a present.

What isn’t gifting?

Not every financial asset you dispose of is considered a gift though.

You can sell or reduce your existing assets to meet your own living costs, or to pay for a holiday or fund renovations to your home for instance.

Similarly, if you sell a house to your child for less than its value, but you retain the right to live there for life, this is known as a ‘granny flat interest’. In such cases, the property transfer isn’t considered a gift and is not subject to the gifting rules2.

You can also transfer assets between yourself and your spouse without the gifting rules applying. This includes making contributions to your spouse’s superannuation or splitting contributions to your spouse3. However, if your spouse has reached their age pension age, the amount contributed to their account will count as an asset and be subject to deeming for Centrelink purposes.

Taxation and gifting rules

If you’re worried about the implication of gifting for the recipient, don’t be. Children or family members who receive a gift don’t need to declare it as assessable income, so they don’t need to pay tax on it. However, depending on how they invest the money, they may need to pay tax on any interest earned in a savings account or term deposit for example4.

Limits on gifting

While you can arguably gift away as much money as you can afford, the Government has rules on gifting which affect your entitlement to the Age Pension and other benefits.

Whether you’re single or a couple, Centrelink allows you to gift the lesser of, a maximum of $10,000 per financial year or a total of $30,000 over five financial years without affecting your pension2. This is known as your ‘allowable disposable amount’.

Centrelink assesses your gifts every five years to see if they’ve reduced your total assets or have exceeded the gifting limit. Any amount you gift over the limit is categorised as a ‘deprived asset’. In other words, if you’ve disposed of an asset for less than its value, it’s still treated as your asset for five years from the date of the gift, even though you no longer have it.

The amount of the gift is included in your asset test, which determines whether you qualify for the Age Pension and the rate it’s paid at.

Centrelink also applies deeming and includes the amount of the gift in your income test and it may negatively impact your future payments.

However, it’s not all bad news. While gifting can negatively impact your Government payments, it also has the potential to increase them, if you adhere to the rules of gifting. By gifting money to family members, you’re not only reducing the overall value of your assets but you could potentially receive a higher Age Pension. This is because, for every $1,000 of assessable assets you hold above a relevant threshold, Centrelink will decrease your Aged Pension by $3 per fortnight. So, if you gifted the maximum $10,000 in a year (reducing your assessable assets), you could possibly increase your pension payments by $780 that year5.

Set a good example

Gifting money to children or other family members can have benefits for everyone involved. It will probably leave you feeling happy and content knowing you’ve been able to help someone you care about. And you might also benefit from a potentially higher Age Pension entitlement.

You can also help children by setting a good example of sound money management throughout their lives. Parents who budget well, live within their means and have good savings habits can have a significant influence over how their children approach money and their financial wellbeing.

But before you start gifting money, it’s a good idea to speak to a financial adviser or accountant so you understand all the rules of gifting and they can work with you to tailor a strategy suited to your circumstances.

 

Next: Australian retirement age

 

References

1 Mozo https://mozo.com.au/home-loans/articles/bank-of-mum-and-and-dad-report-2020
2 Services Australia https://www.servicesaustralia.gov.au/individuals/topics/gifting/27276
3 ATO https://www.ato.gov.au/Forms/Contributions-splitting/
4 ATO https://www.ato.gov.au/Individuals/Income-and-deductions/Income-you-must-declare/Amounts-not-included-as-income/
5 https://www.rsm.global/australia/insights/wealth-insights/aged-pension-tip-2-could-gifting-improve-your-centrelink-aged-pension

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The article is current as of 15th June 2020.

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