What you need to know about gifting money to your kids
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.
What is classified as a ‘gift’?
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 for the purposes of a loan
- Selling or transferring an asset that is now less than its original value, such as a car or property
- Depositing money into a trust fund that neither you or your partner can control
- Paying tuition fees for your grandchildren
Why consider gifting?
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 reach retirement. By doing this, you may potentially increase your government pension payments and improve other benefits you may receive or are entitled to receive.
Is there a limit to the amount I can gift?
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.
Do I have to tell Centrelink?
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.
What happens if I go over the gifting limit?
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 Australian Government, means you have parted with an asset for less than its value.
Every five years, Centrelink assess 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:
- They’ll include the amount in your asset test - this is a test that decides whether you qualify for the Age Pension and determines the rate it will be paid at.
- They’ll also apply deeming and include the amount in your asset test - deeming is a set of rules Centrelink uses to work out your income based on the financial assets you own.
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.
Can gifting improve my pension 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.
Will my child have to pay tax on gifts?
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.
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 a top notch savings account to maximise your return is essential. You can compare more than 200 savings accounts by using our savings account comparison tool.