Before providing financial assistance to family or friends, it’s important to understand the social security ‘gifting’ rules and consider the impact they could have on current and future entitlements.
Gifting and social security
We all want to do what we can to help those around us. Particularly during tough economic times, it’s understandable if you want to do what you’re able to financially, to help your loved ones and even your friends.
While there are technically no restrictions on how much you can give away, if the gifts exceed certain limits, the extra amount won’t be disregarded when entitlements for most social security benefits and concessions are calculated. In other words, the gift may still be assessed, even though you no longer have the money or asset.
Also, gifts exceeding the allowable limit are assessed for five years from the date of the gift. So even if you’re not receiving a social security benefit right now, gifts made before you become eligible could still impact your future entitlements.
What types of arrangements are assessed as gifts?
Some of the arrangements that are assessed as a gift might not immediately spring to mind when thinking about a ‘gift’ in the everyday sense of the word.
For social security purposes, arrangements that may be assessed as gifts include:
- giving cash or transferring ownership of another asset to another person
- selling property or another asset for less than market value (where the sale isn’t on the open market)
- being guarantor on a loan, where the borrower defaults and you repay their debt
- forgiving a debt owed to you by someone else or paying someone else’s debt for them
- paying someone else’s expenses, such as a grandchild’s school fees, wedding expenses or costs of living
- making a donation to a charity or other organisation
- contributing cash or assets into a trust or company that you or your partner do not control
- giving up control of a trust or company by selling units or shares for less than market value
- not accepting or giving away an increase in your income, without receiving adequate consideration
- buying a property or another asset either with, or in the name of someone other than your spouse, where the market value of the share you legally own at the time of purchase is less than the amount you paid, and
- forgoing your interest in a deceased estate or a superannuation death benefit.
Some arrangements are not assessed as gifts. These include:
- transferring cash or another asset to your spouse
- transferring or selling assets where you receive cash or other assets that are at least equal to the market value of the assets transferred
- certain gifts made to ‘Special Disability Trusts’
- choosing not to use an asset to generate income (such as keeping an investment property vacant)
- repaying a debt or loan that you owe, and
- arrangements referred to as ‘Granny Flat Rights’, which involve being granted the right to live in a property for life in return for cash or other assets.
Gifting and social security rules
What are the limits?
When Centrelink and Department of Veteran’s Affairs (DVA) apply ‘means-testing’ to assess entitlements, they disregard (don’t count) gifts of assets up to:
- $10,000 per financial year, and
- a maximum of $30,000 in a rolling five-year period.
These limits apply both to individuals and couples combined. So, if you’re a couple, these limits apply to the combined value of any gifts you make.
The thresholds apply to the total of all amounts gifted. Amounts you gift above these limits are called ‘deprived amounts’ and the rules that apply in this case are referred to as the ‘deprivation rules’. The implications of this are explained below.
If you waive your right to certain sources of income (without disposing of an asset), the deprived income will be assessed indefinitely, until the income source is restored.
What happens if I gift above these thresholds?
There isn’t a specific ‘penalty’ for gifting above the thresholds. However, assets gifted above the threshold are not immediately disregarded by Centrelink and DVA and will continue to be assessed as your assets for five years from the date of the gift. These amounts will be assessed as ‘financial assets’ when calculating your social security entitlements under the means-test.
The means-test that applies will depend on the benefit or concession type and may be based on your assets and/or income. This means that for certain payment types and concessions:
- the deprived amount is counted as an asset under the assets test, and
- income is calculated on the deprived amount for the purpose of the income test, based on the set deeming rates (the same assessment that applies for other financial assets such as shares and bank accounts).
At the end of the five-year period, the amount you’ve gifted is disregarded and is no longer assessed for means testing to determine your entitlements in the future.
What is the impact of gifting on my benefit or concession?
The actual impact of gifting on your entitlement will depend on the amount of the gift, as well as what it is you’re gifting. Any impact will also be determined by the type of benefit or concession you’re eligible for and the specific income and assets tests that apply to that entitlement.
If you’re already receiving a pension or allowance, gifting within the thresholds in most cases doesn’t provide a significant increase in the rate of payment you’re entitled to. Although, you should speak to a financial planner to determine the actual benefit to you.
In a lot of cases, the cash or assets that are gifted are already assessed as yours before you gift them and are already included when calculating your social security entitlements.
For example, if you have $20,000 in cash that you wish to gift to your child to help pay for their wedding, the $20,000 is already assessed as your asset (with income also deemed) while the money is in your bank account.
Assuming you haven’t made previous gifts that have reduced your available gifting thresholds:
- $10,000 of the amount gifted will be immediately disregarded, as it’s within the annual limit, and
- the $10,000 above the annual limit will be assessed as a deprived asset and continue to be assessed as your financial asset for five years.
This means that you’ll actually reduce your assets and income due to the fact $10,000 is immediately disregarded. However, the $10,000 that continues to be assessed for five years will be assessed the same way as it was before the money was gifted, after which time it will also be disregarded.
This outcome might be different in some circumstances, for example:
- if you gift an asset that isn’t a financial asset (such as an investment property that has a different income test assessment), or
- if in providing the gift, you increase your assessable assets (for example, if you redraw from your home loan, you’re effectively creating an asset you didn’t have assessed before).
To understand the impact of a particular kind of gift in relation to your specific circumstances, you should speak to your financial planner.
Any change to your circumstances needs to be reported to Centrelink within 14 days. This extends to all gifts you make, even if the gift is within the limits. It is important that changes are reported immediately to ensure that you don’t receive an overpayment, which could create a debt you’ll owe.
If you’re applying for a benefit or concession, the application form will prompt you where required, to disclose information about gifts you or your partner have made in the previous five years.
Other important considerations
As well as considering the impact on your current and future eligibility for Government concessions and benefits, it is important to think about:
- whether the gift will impact your ability to meet future expenses
- any tax implications, including capital gains tax, land tax and stamp duty
- the impact on either home or residential aged care fees (if applicable)
- whether you need to review your estate planning arrangements, such as updating your Will, and
- whether associated insurance policies need to be transferred or cancelled.
To find out more about gifting, how the rules apply to you and what other things you should think about, speak to your Pinnacle advisor. You can also visit servicesaustralia.gov.au for more information.
Source: GWM Adviser Services Limited (Part of National Australia Bank group of companies)