Beware the Bank of Mum and Dad

Five things you need to know about gifting

The Bank of Mum and Dad is an emotive and not entirely accurate term when it comes to family loans. It’s not just adult kids who are the beneficiaries of the largesse of older Australians. It can be friends, nieces or nephews, carers, new partners – there’s no end to the people with whom we may wish to share our money and assets.

We’re discussing family loans and gifts this week as Christmas is a time for family gatherings and money often enters the conversation. The December-January break is also a time for reflection and making plans for the coming year. This means finances are often a priority.

The challenge with gifting or lending to our nearest and dearest is that it can have severe economic impacts on our own wellbeing. So it’s important to understand the rules which apply and to ensure that you protect your own interests as well as enabling those of others. Here are five things about loans and gifts that you may not know – but need to.

1. A loan is not a gift

You may or may not currently be affected by Centrelink rulings, but it’s worth knowing the detail on gifts and loans as 80% of Australians will be receiving a pension by the time they reach their 80s. The major point is that a loan is not a gift and both are treated differently by Centrelink when it comes to entitlements. If you make a loan, there is an expectation that this amount or asset will be paid back or returned. Centrelink requires evidence of loans, including a contract or email exchange with terms and conditions of the said loan including interest that will be paid. Income will be deemed from this amount, regardless of the status of the loan. When you give a gift, there is no expectation of any return or repayment. But if you are gifting there is a limit in value and time, which will apply to how much you can give.

We shared how this detail worked in the case of Sam earlier this year. It’s worth reading about his situation so you can understand how the rules were applied – and how they might work in your case.

2. Timing your gifts can also affect entitlements

Assuming that you decide to make a gift to someone, then when you do so can also affect your entitlements. Centrelink has a five-year ‘gift history’ rule which means that your gifting allowance of $30,000 applies over a five-year period. Sometimes people wish to give more than this, in which case it’s important for them to fully understand the beginning of the period when the $30,000 gift rules start to apply. In Sam’s case, he was able to gift his son $100,000 by starting his transfers well before he retired. Here’s how it worked for him.

3. No one should ever pressure you into giving or lending money

This would constitute financial and/or elder abuse. Most parents love their children so much that there is no end to their desire to please them. This extends to many wishing to leave an inheritance, even if it means scrimping and saving to do so. But being pressured into transferring money is against the law. It’s a fine line, and as family relationships and emotions are involved, actual abuse can be difficult to discern. In which case, it’s helpful to know the detail of the law. You are then better equipped to judge if this is happening with your family or friends and if so, you can seek support and guidance. Such help is available free of charge through a national service with a detailed toolkit covering your possible responses.

4. Is your donation actually a gift?

The definition of the treatment of donations on the Services Australia website leaves a lot to be desired:

‘We may include it in your tests if you donate to a church or charitable organisation. For example, if you donate 10% of your wages to your church.’

So we asked guru Steven (head of our Customer services Team) to elaborate. Here’s his explanation:

‘Effectively donations are no different to any other form of gifting and are therefore assessed in the same way. The reason Centrelink says they ‘may’ include it is because there are those allowable amounts you can gift with no penalty (but not because they come under a different set of rules). The only exceptions that may be applied can be found on the Services Australia website.

5. Big ticket loans or gifts need extra research

Helping someone to buy a house, paying for a wedding, or paying down student debt can involve large sums of money. It’s a very generous gesture, but it shouldn’t work against you. The first step is to define whether you wish this financial assistance to be a gift or a loan (see above). It also helps to consider if this is a private ‘one-off’ -or if it is a public one. In which case, there may be repercussions – for instance, if you pay off one grandchild’s loan, do you do this for all of them?

If you decide you are making a loan, it will be necessary to ensure that the recipient is fully aware that this is the case – and that the necessary contract or agreement is in place. Also that the amount needs to be repaid, by a nominated date and if any interest payments will apply. Similarly with a gift, checking the timelines if you receive an Age Pension means you will know when to notify Centrelink in the first instance, and with updates during the relevant period.

In summary, yes, this is your money so in theory, you should be entitled to do whatever you want with it. But that’s in the perfect world. In the here and now, obeying the rules related to your particular financial circumstances means that your gift or loan can truly be given with no strings attached.

MORE:

Services Australia definition of a gift:

It’s a gift if both of these apply:

• you sell or transfer an income or asset
• you get less than its value or nothing in return.

It’s not a gift if both of these apply:

• you sell or transfer an income or asset
• you get money, goods or services to the same value.

Essentially Centrelink call it adequate consideration when you get money, goods or services to the same value.

We offer entitlements consultations with our Advisers if you would like to understand more about this or other ways to maximise your entitlements.

Book a consultation