Whether you’re helping them buy their first home or paying school fees for your grandchildren, gifting money to your children can be a wonderful thing to do. But while you may think the process simply involves writing a large cheque in your child’s name, it won’t be long until you realise things are a little more complex, especially if you are on the Age Pension or receive Centrelink payments.
There are a few things you’ll need to understand before you can hand over a large lump sum of cash, from gifting limits to how it might affect your pension. This guide is set to answer some commonly asked questions about gifting money to your kids.
Gifts can come in different forms; however, a gift is generally defined as selling or handing over an asset or income with the expectation of either getting less than its market value or nothing in return.
According to Centrelink, some examples of gifts are:
Gifting money to your children can help provide them with financial assistance, especially if there’s a goal they’re working toward like saving for a home loan deposit or buying a new car.
You may also consider gifting if you’d like to offset an asset before you retire. By doing this, you may potentially increase your government pension payments and improve other benefits you may receive or are entitled to receive.
If you are receiving the Age Pension or other benefits from Centrelink, there is a limit to the amount you can gift your children.
Also known as the $10k and $30k rule or a ‘gifting free area’, whether you’re a single person or a couple, the permitted amount is $10,000 in cash and assets over one financial year or $30,000 in cash and assets over five financial years, you cannot gift more than $10,000 in a single financial year.
If you are planning on gifting money in the near future, you’ll need to let Centrelink know within 14 days of when the money transfer occurred.
When you gift money to your children, the amount you give is classified as your ‘allowable disposable income’. Any amount that exceeds the gifting limit is then recorded as a ‘deprived asset’, which according to the Australian government, means you have parted with an asset for less than its value.
Every five years, Centrelink assesses gifts you make to determine whether they have reduced your available assets or have exceeded the gifting limit.
If you have gone over the allowable gifting limit, Centrelink will do two things:
One potential downfall of deeming is that these rules assume the rate of income your assets earn, regardless of whether they do or don’t.
So if Centrelink believes you may be earning an income on your gifts, it may negatively impact your future payments.
While gifting can negatively impact your payments, it also has the potential to improve your payments, as long as you stick within the gifting limit.
Like we mentioned earlier, gifting can be a great way to reduce your assets and earn a slightly higher Age Pension. For instance, according to First State Super, if you decided to gift the maximum $10,000 and are within the gifting free area, you could increase your pension payments by $780 in a year.
The short answer? No.
According to the ATO, monetary gifts ‘given out of love’ by relatives does not make up part of their assessable income and therefore does not have to be declared. However, if the money is stored in a savings account and earns interest, the interest will need to be declared.
While you can gift or transfer assets for any value you choose if you gift within certain government limits, you could increase the amount of benefit your receive. But if you exceed the government’s allowable gifting amount, your rate of pension or allowance may be negatively affected.
You have a gifting free area of $10,000 per financial year, limited to $30,000 per five financial years. If the total of gifts made in a financial year exceeds $10,000, the excess will be assessed as a deprived asset. This is called the $10,000 rule.
A maximum of $30,000 can be gifted over a rolling period of five financial years, but must not exceed $10,000 in any one year to avoid deprivation. Only $30,000 of gifting in five years can be exempted. This is called the $30,000 rule.
The same amount applies whether you are single or a couple.
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Some examples of gifting for Centrelink purposes include:
Money gifted to your spouse/de facto is not classified as a gift.
Centrelink will assess all the gifts that you make to see how they have directly or indirectly reduced the assets available for your personal use and whether they have exceeded the allowable amount. You must tell Centrelink about any gifts or transfers within 14 days of when they have occurred.
If you are a part age pensioner and are affected by the asset test, gifting is a way of reducing your assets and to gain a slightly higher Age Pension payment. If you have some excess funds that you would be comfortable to gift to the children, bearing in mind the limits as mentioned earlier, then this strategy might be worth considering.
For every $1,000 of assets, you gift your pension may improve by $3 per fortnight or $78 per annum. If you gift the maximum $10,000 and you are within the asset test free area, and pension cut off limit you would be entitled to another $30 per fortnight.
Are gifts taxable? I am frequently asked the questions, what are the tax implications of giving money away? If I receive money as a gift, do I need to pay tax on it? The answers are varied. The most recent that I heard was in a meeting with someone who mentioned their tennis partner told them they could only give away $10,000 per year and anything over that is taxable.
This confusion isn’t surprising, as when you search the Australian Tax Office website, they have a sentence which reads ‘Other amounts that are not taxable: generally, you do not have to declare…small gifts such as cash birthday present (however gifts may be taxable if they are large amounts).
But there is no guidance given on what is small and what is large.
I have spoken to the ATO about this on several occasions, and the verbal advice I have received is the same; there is no tax on gifts in Australia. Giving away money is not a taxable event for the recipient. However, suppose the person giving the monetary gift sells an asset, e.g. investment property, share portfolio, etc.. In that case, that event may give rise to a capital gains tax, but the act of giving itself is not taxable.
If you dig deep into the ATO archives, you can find a little more commentary on this. The ATO was asked this question;
The short answer is no. These monetary gifts from your parents would NOT form part of your assessable income, given the following facts and circumstances:
Given the above facts, this gift does not have any connection to income-producing activity and would not be assessable income.
It is wonderful that you want to gift to your daughter and son-in-law. Regarding the taxation issue, you are correct. Generally, gifts are not considered taxable to either the giver or the receiver. The tax office in limited circumstances may have reasons to tax. As I am unaware of your personal circumstances, it would be best to get the advice of a tax adviser to determine your individual tax situation.
You and your partner can give away money and other assets up to any value you chose at any time. There are many other things that you should consider, though when gifting money. Firstly, before you make the gift, I would recommend that you should carefully consider the impact it will have on your own financial security to ensure that you personally will not be materially impacted, especially in your retirement. It would be best to speak with a financial adviser as to the impact that this may have before making the gift to ensure that your own financial security is not impacted. It is good and well helping your children, but if it is to your own financial detriment, you have to determine whether it is worthwhile.
You also never know what the future holds. Your daughter and son-in-law may have a very strong relationship now, but the truth of the matter is, that unfortunately, one in three marriages end in divorce. I am sure that you would not like to see half of your generous gift be part of a financial divorce settlement. My advice would be to speak with a solicitor and look at putting in place a loan or mortgage agreement so that if your daughter and son-in-law were to divorce that the monies that you have gifted then get returned to you. There would be cost involved in setting this up, but it is protection against this unfortunate event. The monies could then be gifted back to your daughter to help set herself up financially after the divorce.
You also have not mentioned if there are other siblings involved. If there is this could pose some issues whereby the other siblings may not be in receipt of a gift such as this. You may, as a result, want to put in place some equalisation via your estate plan to ensure that all your children receive a similar benefit on your passing.
There is no mention whether you are in receipt of any Centrelink benefits or maybe in the future, but gifting can have a number of implications on a persons’ rate of income support from Centrelink. The gifting rules apply to any gifts made in the 5 years before receiving a pension or allowance, so if you are considering applying in the next five years for Centrelink, you need to advise Centrelink of the gift at the time. Both a single person and a couple have a gifting free area of $10,000 per financial year, limited to $30,000 per 5 financial years. If the total of gifts made in a financial year is more than $10,000, the excess will be assessed as a deprived asset. This is called the $10,000 rule. A maximum of $30,000 can be gifted over a rolling period of 5 financial years, but must not exceed $10,000 in any 1 year to avoid deprivation. Only $30,000 of gifting in 5 years can be exempted. This is called the $30,000 rule. If you gift more than the allowable amount, the amount over the above limits will be assessed as an asset for five years from the date of the gift. It will also be subject to income deeming provisions, impacting on both the assets and income tests.
If you give away more than $30,000 of assets in a rolling five-year period, the amount in excess may be counted as a financial asset for five years from the date that you give it away. This excess amount will also be deemed to be earning income under the income test for the period of five years from the date you gave it away.
Example: A person gives away $10,000 on 1 May each year for three years. During the fourth year, he gives a further $10,000 away. Although he has not exceeded the annual financial year disposal limit of $10,000, he has exceeded the $30,000 limit during a five-year rolling period by $10,000. The $10,000 excess will be assessed as a financial asset and deemed to be earning income for five years commencing on the date that the $30,000 limit was exceeded.
No. DVA does not need to be told about small, one-off gifts (for instance, purchasing a toy for a grandchild, or gift vouchers for family or friends) or spending for another person’s benefit that would be reasonable for any other member of the public on a day-to-day basis (for instance, buying someone else’s coffee or lunch, or buying the weekly groceries for your son or daughter’s family from time-to-time). These kinds of gifts would not normally be taken into account for pension or payment purposes.
However, the $10,000 free area can be reached through the accumulation of gifts. It is recommended that you keep track of any sizable gifts so that you can notify DVA if you are concerned that you may have gifted in excess of the free area, or be in danger of doing so. Failure to advise DVA of this may lead to an overpayment of pension or payment, which DVA would recover. Large gifts should always be reported to DVA so that we can ensure that you receive your correct pension or payment entitlement.
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Suppose you have deliberately deprived yourself of income – for example, by forgoing a superannuation increase so that you can maintain or increase your rate of pension or payment. In that case, we count the deprived income as income for pension or payment purposes. Deprived income is counted for pension or payment purposes for as long as you deprive yourself of this income. The $10,000 / $30,000 threshold does not apply where you deprive yourself of income.
Example: If you have deprived yourself of income of $12,000 per annum by gifting your wages to your children, we will count this entire amount as income for pension or payment purposes for as long as you continue to deprive yourself of the income.
Example: You own two houses, one of which you live in and the other that you allow a friend to occupy paying rent of $50 per week. It has been estimated that the property could earn approximately $360 per week. The purpose of this arrangement is to enable your friend to save a deposit to purchase the home from you. As you have received significantly less than market rent as your financial consideration, you can be said to have undertaken a course of conduct that diminishes your ordinary income by $310 per week. Accordingly, you are taken to have disposed of income. However, the amount of income that is held in your assessment may be reduced by certain costs involved in preparing the property for rental.
So there you have it, there is no tax on genuine cash gifts made in Australia. And for completeness, the $10,000 ‘annual limit’ referred to above relates to the amount that can be given away by a recipient of the Age Pension. This is often confused with a tax limit but as the ATO has said above giving away money is not taxable.
In any circumstance, it’s best to consult with a financial advisor or accountant first before you start gifting money to your children, as they can give you a more tailored answer based on your circumstances.
But regardless of whether you’re about to hand over a large sum of money, having top-notch savings account to maximise your return is essential.
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