If you have planned well and feel financially secure for the years ahead, gifting money or assets to family members can be a kind and compelling idea. Just make sure you know how the rules might affect your wealth.
Whether it’s transferring a holiday house to your children or giving money to pay for your grandchild’s education, gifting can be a rewarding experience for both the giver and the recipient.
However, what seems like a simple gesture sometimes comes with a catch. This generous act may be subject to Centrelink Rules that can have an impact on your pension and allowance entitlements.
The rules of gifting
Centrelink gifting rules apply to any gifts made in the five years before receiving a government pension or allowance, such as the Age Pension. If you are a self-funded retiree, it may be the case that no rules apply to how you gift your money or assets. But from the point at which you are five years from potentially receiving a pension, gifting must comply with Centrelink rules.
You can gift up to $10,000 each financial year, and up to a maximum of $30,000 over five years, and gifting within these limits could reduce your total assets and therefore potentially increase your Age Pension payments. You are required to inform Centrelink about any gifts or transfers within 14 days of when they have occurred. If you exceed this maximum amount, it will affect the calculation of your pension entitlements.
Consider the following case study. A retired couple wishes to gift $70,000 to their daughter and son-in-law for a house deposit. As this amount exceeds the annual maximum allowance by $60,000 (the gift amount of $70,000 minus the maximum annual allowance of $10,000), $60,000 will continue to be assessed as the couple’s financial asset for next five years. It will also be deemed to earn interest at the current deeming rates, which are the assumed rates of return Centrelink applies to your financial investments. In the case of our retired couple, the $60,000 financial asset is deemed to earn income at 1.75% per annum (assuming there are no other financial investments).
Gifting bricks and mortar
With housing affordability an ongoing concern, many parents wish to help their children buy their first home, or a larger home. This may be done by gifting the deposit for a house, transferring a property to a family member or selling them a house for less than market value.
It is worth noting that selling them a house for less than its market value may still be considered gifting. Furthermore it may bring other financial costs such as stamp duty and capital gains tax.
Consider our retired couple again. Rather than gifting $70,000 to their daughter, they decide to sell their investment property to her for $400,000, which is $100,000 less than its market value. Because the sale price is significantly lower than the market price of the property, the couple did not receive adequate financial considerations, the deprivation has occurred and the excessive gifting amount of $90,000 (the property’s undervalue of $100,000 minus the maximum annual allowance of $10,000) will be assessed as a deprived asset for the 5 years from the date of the gift, and will be subject to the income deeming provisions, currently at a rate of 1.75% for the first $80,600, and 3.25% for the remaining $19,400 (assuming there are no other financial investments). As the couple bought the house after 20 September 1985 the sales subject to capital gains tax, calculated at the property’s market value rather than sale amount. The stamp duty paid by their children will also be based on the market value of the house.
Tax on gifting
There is no specific ‘gift tax’ in Australia, but if the benefactor invests the money they receive then they will be liable for tax on any income it earns. Suppose our generous retired couple wishes to give $30,000 over three years to their grandson to help with his education. The gift is not taxed as income, however if it is invested in their grandson’s name, any income that is generated from the investment will be taxed. Special taxation rules apply to Australian residents under the age of 18 who generate ‘unearned income’ and money generated from investments in their name may be taxed.
To avoid this, the couple may consider holding the funds in a trust for their grandson. As trustees, the couple would be responsible for the funds, which would be assessed against their Age Pension. Note that trust distribution paid to minors are still taxed at higher rates.
Securing your own financial future
Passing on wealth to family members is a generous gift, however it’s important to discuss with your financial adviser your own lifestyle needs in retirement before deciding how much to gift.
The pension asset limit is currently $205,500 in assets (excluding your home) for a full Age Pension for a single person and $291,500 in assets (excluding their home) for a couple. Your pension rate reduces by $1.50 a fortnight for every $1000 over the asset limit. This reduction will double from 1 January 2017 when your pension will be reduced by $3 per fortnight for every $1000 of assets you own over the full pension limit.
Gifting is an act of goodwill that comes with limitations. It may have an impact on your quality of life after retirement, so please seek advice from your financial adviser.
Taxation considerations are general and based on present taxation laws and may be subject to change. You should seek independent, professional tax advice before making any decision based on this information. Count is also not a registered tax (financial) adviser under the Tax Agent Services Act 2009 and you should seek tax advice from a registered tax agent or a registered tax (financial) adviser if you intend to rely on this information to satisfy the liabilities or obligations or claim entitlements that arise, or could arise, under a taxation law.
Disclaimer: This article has been prepared by Count Financial Limited ABN 19 001 974 625, AFSL 227232, (Count) a wholly-owned, non-guaranteed subsidiary of Commonwealth Bank of Australia ABN 48 123 123 124.
Information in this article is based on current regulatory requirements and laws, which may be subject to change. While care has been taken in the preparation of this document, no liability is accepted by Count, its related entities, agents and employees for any loss arising from reliance on this document.
This document contains general advice. It does not take account of your individual objectives, financial situation or needs. You should consider talking to a financial adviser before making a financial decision.