Gifting to children is an intergenerational wealth transfer strategy that is available in Australia. However, if you are considering gifting some of your wealth to your children or your grandchildren (even if they’re now adults), it is important to understand all of the implications.
What is gifting?
Gifting has a formal definition in the context of financial assets. The Department of Human Services considers that you have gifted wealth when both of the following events have occurred:
- you have sold or transferred an asset or income, and
- you have received less than market value (or nothing) in return from the recipient.
Common examples of gifting
Common examples of gifts that you might give to your children or grandchildren include:
- cars; and
Property and shares are assets that have the potential to increase in value over time. They also have the potential to generate rental income (from property) and dividends (from shares).
Common gifting to children strategies
There are a variety of reasons that you might want to gift part of your wealth to your children or grandchildren, including wanting to:
- give them a head start financially in life (for example, by helping them to enter the property market);
- help them out with their expenses (for example, by paying for their education or a holiday); and
- reduce your assets or income so that you’ll be eligible to receive either a full or part age pension (and potentially other social security benefits).
The Department of Human Services has an interest in monitoring intergenerational wealth transfer because it administers the age pension based on income and assets. To be eligible to receive either a full or part age pension in Australia (and a range of other social security benefits) from Centrelink, you must pass both income and assets tests (also called ‘means tests’. Your income and asset levels must fall within specific thresholds to pass these tests.
How much can you give?
There is no gift tax in Australia (how your children may be affected is dealt with below), but if you’re receiving the age pension or any other social security benefit from Centrelink, there are limits to the value of gifts that you can give. If you exceed those limits, it could affect your social security benefit/s.
The current gifting limits are as follows:
- up to $10,000 per financial year, and
- up to $30,000 over five consecutive financial years.
Gifts within these limits can help you to either:
- become eligible for social security benefits (if the gifts help you to fall within the means test thresholds), or
- they can increase the amount of the social security benefit/s that you currently receive.
On the other hand, if the value of your gifts exceed the current gifting limits, the excess amount will still be included as your asset in the assets test. You will also be deemed to be earning income from the excess amount as part of your income test for the next five years. Even if you aren’t earning income from the asset, deeming provisions under Australian law mean that you will be deemed to be earning income from the asset.
If you’re currently receiving any social security benefit, you must tell Centrelink within 14 days of making a gift.
What are the tax implications for your children receiving the gift?
Your children won’t have to pay tax on the value of the gift itself, except if they sell the asset.
However, if they start earning income from the gift (for example via receiving rental income on an investment property or share dividends), then they will have to pay tax on that income. If you are giving these gifts to your adult children, they will pay tax on any subsequent income at their marginal rate.
It is important to understand if you are giving these gifts to children under the age of 18 (minors) that they will pay a higher rate of tax (currently 66% if their income is between $417 and $1,307 per year, and 45% if it is over that amount).
What are the tax implications for you in giving the gift?
There are no tax implications for you unless you’re gifting an asset that is subject to capital gains tax (CGT). For example, an investment property or shares. If you’re gifting these assets to your children, you’ll be deemed to have received the market value of the asset at the time of the gift.
Even though you didn’t receive that amount, you will be liable to pay CGT if you have made a capital gain on the asset, unless you are gifting your principal place of residence. A residential home is exempt from CGT under Australian taxation law.
Other important gifting to children considerations
Besides gifting limits, other important considerations include:
- your own situation and whether you can afford to give the gift, and
- how the gift will affect your children and their future. It is important that your children are financially responsible enough to make the right decisions once they receive the gift.
This article contains general advice only. It does not take into account your or your family’s individual objectives, financial situation or needs. You should seek advice from a financial planner or other professional adviser before making any financial decision based on this information.