With the rising cost of living, we are seeing more parents supporting their children financially. It is natural to want to ensure your children have the funds they need to maintain a comfortable standard of living. To this end, we see many parents assist their children with things like housing, private school expenses for grandchildren and holidays. This can sometimes be driven by an immediate need for financial assistance, or by parents wanting to enjoy sharing the family wealth during their lifetime, rather than passing it by way of inheritance.
This kind of generous financial support can be life-altering for the recipient. However, individuals who wish to make gifts to their loved ones should consider some of the factors we outline in this article, to ensure that they do not suffer any unintended consequences as a result of their generosity, and to protect the value of their gift.
Tax implications
Depending on the nature of the gift you are giving, you should always consider whether giving the gift gives rise to any tax consequences for either the gift giver or recipient.
For example, if you are giving away property or shares by way of a transfer to a gift recipient, you might need to pay capital gains tax on the disposal of the property. Capital gains tax liability can be significant, particularly for real property where property prices have increased significantly over the last decade.
On the flip side, the gift recipient may need to pay stamp duty on property or assets that they are receiving. Since stamp duty is a state-based tax, the way it is calculated and the exemptions that could apply may differ from state to state (or territory).
In addition, the gift recipient may be assessed for land tax on the receipt of real property if they already own real property in the jurisdiction where the gifted property is located. Like stamp duty, the land tax rules are different in all states and territories.
For some people, a gift may be in the form of an interest in a business, for example, where the retiring generation passes ownership of the business to the next generation for no consideration. There are different layers of complexity when dealing with business assets and the tax treatment and documentation of the transaction should be carefully considered before it is actioned.
Before you commit to gifting assets that may be taxable, you should seek advice on the tax consequences of the transfer and your gift recipient should also seek advice on the tax consequences of acquiring an additional asset. If the gift is a business asset, this is even more important, as there may be tax rollovers or concessions that you can access with appropriate advice and planning to alleviate the tax burden.
Relationship breakdowns and personal liability for your gift recipients
You should consider the relationship status of your gift recipients. If your gift recipients are married or in a de facto relationship and go through a relationship breakdown, there is a possibility that a gift made to them directly could end up in the pool of assets to be divided between them and their ex-partner.
If your beneficiary is a business owner or exposed to a greater level of risk as a result of their career, then a gift made directly to them will be exposed to personal claims against them individually.
In both cases, this risk arises due to the gift being made directly to the individual, and therefore being considered an asset they personally own.
If these issues are of concern for you, we encourage obtaining advice about steps that can be taken to protect the value of the asset, such as structuring the arrangement as a loan rather than a gift, and taking security over the asset where appropriate and possible.
Estate issues
If you have more than one child and do not gift assets to all children equally, this can give rise to estate issues in the future. Once you pass away, the children who have not benefited from gifts during your lifetime may claim against your estate on the basis that they have not been adequately provided for. To minimise the success of such claims, you need to ensure that you have accounted for these gifts in your estate planning documents appropriately.
If you intend to benefit your children disproportionately during your lifetime and wish to ‘even up’ entitlements through your estate plan, you should obtain specialised estate planning advice, to ensure that an adjustment mechanism that suits your needs is included in your Will.
If a gift is given on the expectation that the gift recipient’s entitlement under the giver’s Will will be reduced by the same value, we recommend considering documenting the gift by way of a Deed of Gift that both the gift giver and recipient sign. The terms of the Deed of Gift should include an acknowledgement by the gift recipient that the gifted asset is to be treated as an advance on inheritance.
Social security benefits
If you are in receipt of a pension or approaching entitlement to receive a pension, gifting may impact your pension entitlements. It is important to note that Centrelink allows pensioners to make gifts of up to $10,000 each financial year and $30,000 over 5 years. If you give a gift of a value exceeding these thresholds, it will be counted as an asset you own and will be subject to the income test for 5 years after the date of the gift.
Furthermore, the receipt of a gift can affect the recipient’s pension entitlement. Of particular concern can be the loss of a pension as well as the benefits that accompany the pension (such as a health care card and other subsidies).
Appropriate financial advice should be obtained before making a gift to ensure the gift does not adversely affect a pension entitlement.
Summary
Before making a gift, we encourage you to consider whether any of the issues above may be relevant to your circumstances and to seek advice before making the gift. Any strategies to protect a gift should be put in place after receiving appropriate legal, financial and accounting advice.
