Christmas is a time of giving, when thoughts turn to family and to helping those less fortunate. To gift in a meaningful way that maximises the benefits, it's important to consider tax.
While Australia doesn't have a gift tax, there are tax considerations nonetheless for both the giver and the recipient.
Buying a toy for your grandchild is one thing but many parents wish to help their adult children or grandchildren with more substantial gifts such as a home deposit or a car. If you receive a Centrelink age pension now or are within five years of retiring, that "gift" will be counted as an asset and could affect your pension.
Gifting with the potential to impact your Age Pension entitlements comes in many guises. It might be donating 10 per cent of your salary to your church, buying a car for your daughter or selling her a rental property you own for less than market value.
If you gift more than $10,000 a year or a total of $30,000 over a five-year period, then the excess will be counted as an asset by Centrelink for five years, when it assesses your eligibility for an aged pension.
Your gift won't just count in the assets test but deeming may also be applied under the income test. Deeming rules are used to work out how much income your earn from your financial assets, irrespective of their actual earnings.i
Deeming rates have recently fallen to 1 per cent for a certain level of your total financial assets, and 3 per cent above that level. Even so, this can easily eat into your retirement income.
How do the gifting rules work?
Say you lend your daughter $50,000 to by a home two years before you retire. Centrelink would view the first $10,000 as an allowable gift and it would make no difference to your situation. However, it would treat the remaining $40,000 as a deprived asset subject to the gifting rules.
What's worse, if your daughter were to repay $40,000 in two years, then not only would the original $40,000 be counted in the assets test and deemed under the income test but now the $40,000 she repays would be added to this sum.
That's $80,000 treated as an asset and deemed to earn income.
Can you afford to give?
Clearly, it's wonderful to give with a warm heart and help relatives when they need it and you can see the joy it brings. Even so, you need to be very mindful of the repercussions for your own wellbeing.
Are you sure you won't need the money to finance your retirement? Life expectancy has increased greatly so that many people can now expect to live well into their 80s and beyond.
It may be that you don't qualify for a pension on retirement, but what if you give away a sizeable sum and then need to fall back on the pension sooner than anticipated? If the help were needed within five years of your gift giving, then the amount would be subject to the gifting rules.
Of course, if you are not in receipt of a Centrelink pension nor expect to be, then you can gift away to your heart's content, provided you have the means.
Tax implications for children
It's not just the giver who can run into problems. You need to be mindful of any repercussions for the recipient of your generosity. It's natural to want to give money to your grandchildren, perhaps to help kickstart a savings plan for their future, but there are tax implications if they're under 16.
If they earn less than $120 in interest from a savings account, then the financial institution will not withhold tax; if they earn between $120 and $240 the financial institution will withhold tax at 47 per cent if you don't provide their date of birth or a tax file number. If they want a refund, then they will need to lodge a tax return.
Depending on your circumstances, we may be able to help you find a more tax friendly investment to suit the needs of both you and your young family members.
Giving to charity
Giving to charity is often top of mind at Christmas too. Any donation over $2 is tax deductible but this has no bearing if you are retired and not paying tax. Of course, the reason for giving should never be predicated on tax considerations, although it may be handy.
A tax deduction only applies if the charity is a deductible gift recipient (DGR) endorsed by the ATO or listed by name in the tax law, so you need to check that the charity has DGR endorsement.
Giving to those in need or to those you love can be a rewarding experience no matter what time of year, but it's important to understand the implications for both giver and receiver.
If you would like to know more about how gift giving will impact on your financial wellbeing and that of your family, then give us a call.