Giving money to your family may be something that brings you joy, but it’s important to understand the financial and tax implications of doing so.
As the age pension eligibility is subject to an income and assets test, many part-pensioner retirees choose to give away some of their assets with the aim of increasing their pension payments.
This is called gifting.
Before you gift, it’s important to consider your own budget first. Next, you need to ensure that you follow the Centrelink gifting rules and avoid exceeding the gifting limits.
What are the Centrelink Gifting Limits?
How much can a pensioner gift to family?
The gifting limits do not prevent pensioners from giving gifts to family or friends, but it will likely minimise the Centrelink benefits that pensioners receive.
Pensioners can gift up to $10,000 per financial year and no more than $30,000 in a 5 year period.
The limits are the same for both singles and couples.
Any gifts that exceed the allowable amount will be counted in your assets and income test.
It’s important to note that these gifting rules don’t just apply to existing pensioners. They also affect people applying for the age pension too.
It’s also important to remember how your gifts to family members will affect their own financial circumstances. If your children or grandchildren are earning their own income, consider the best way to give them money that will minimise tax for all involved.
While the person you gift money to will not have to pay tax, they will have to declare any interest they received from that money. Most gifts come from a place of love and care, but without the correct tax planning, some can actually have a negative effect.
What is Considered a Gift for Centrelink purposes?
Centrelink defines a gift if you sell or transfer an income or asset and you get less than its value (or nothing) in return.
An asset is not considered ‘gifted’ if you receive money, goods or services in return for the same value
Gifting Rule Exemptions
Certain gifts can be made without triggering the gift clause.
Here are the exemptions that don’t fall under the Centrelink rules:
- Granny Flat Interest: if you transfer a house for less than its value, it may not be considered a gift
- Forgone Wages: if you transfer a farm for less than its value, it may not be considered a gift if you give it to a close relative or if they have worked unpaid on the farm previously.
- Special Disability Trusts: you can give up to $500,000 to a Special Disability Trust if you are an immediate family member of the trust beneficiary
How Does Gifting Affect your Age Pension payment?
How Gift Breaches Affect the Assets Test and Income Test
If you gift an asset that exceeds the Centrelink limits, this may be considered under both the assets and income test.
For the next 5 years, this may lower the amount you usually receive from your age pension.
A real-life example
Recent retiree, Frank has reached age pension age and based on his current assets and income, he should be eligible for a part pension. However:
- Four years ago he gave his daughter one of his cars, valued at $25,000
- At the same time, he gave his son $25,000 in cash, to match the value of the car
- Two years ago, Frank sold a beach house on the open market for $210,000. This was $40,000 less than the initial valuation from the estate agent
- In the past year, he spent $35,000 on home renovations and $15,000 on an overseas trip.
So what does this mean for his pension assessment?
The money spent on renovations and holidays counts as normal living expenses, not a gift.
Likewise, with $210,000 being the best offer Frank received for his holiday home after it had been on the market for a couple of months, the property would not be considered to have been disposed of for less than its market value.
Whilst he understands that the money he gave to his son is clearly a gift, Frank’s biggest surprise is the treatment of the car. Four years after he gave it to his daughter, it’s about to be treated by Centrelink as an asset that Frank still owns.
That means Frank gave away $50,000 in one year. The annual ‘Gifting Free Area’ is $10,000, so the difference, $40,000, will be counted as an asset for the next year.
This will reduce Frank’s pension by more than $100 per fortnight.
If Frank had planned ahead of time and sought professional financial advice before gifting, Frank may have been able to maximise his age pension and enjoyed more income in retirement.
Seeking a financial adviser in Byron Bay or Lismore?
To gift or not to gift?
The right answer depends very much on personal circumstances, so talk to your financial planner. He or she can help you work through all the issues, including the complex calculations of the impact of multiple gifts over several years.
If you have concerns about gifting assets before reaching Age Pension age or think you will breach the gifting limits, you should seek advice from a licensed financial planner.
The Centrelink processes are complex and the regulations are constantly changing. Financial planners can help you navigate the gifting rules and maximise your retirement income.
Our financial adviser can help you with making smart financial decisions for retirement, gifting and maximising your pension.
Seek financial advice in Byron Bay from TNR Wealth Management. We have an experienced professional advice team offering financial planning services in the Northern Rivers.
For more information or to speak to one of our Financial Advisers please contact TNR Wealth Management on 02 6621 8544.