When is a loan a gift?

 

And why does Centrelink care?

A few weeks ago we recounted how the gifting rules worked for Mary, Jeffrey and Hannah. We received a lot of questions from members who were totally confused as to whether they had loaned or gifted money to family and friends. And some wondered why it is any of Centrelink’s business anyway?

Today we look at the difference between a loan and a gift from the perspective of Centrelink.

The important thing to understand is that there is a difference and your Age Pension entitlement could change depending upon whether you decide to give or loan money.

Let’s start with how this affected Sam.

And we can then go through the rules that meant he was able to maximise his income once we explained his options.

Why Sam gifted early

Sam has just turned 61 and will become eligible for the Age Pension when he turns 67. He wants to loan his son $100,000 sometime in the future, to help him with home renovations. He can call it a loan, but he doesn’t expect his son to repay the money.

When he learns about the ‘five year rule’ which is applied to gifting for Age Pension entitlement he realises it is smarter to gift this money now.

How will this work?

The full amount of $100,000 will be linked to Sam’s ‘gift history’ for a period of five years, despite the fact that he has yet to apply for the Age Pension.

He gives the full amount to his son, and Centrelink considers that this amount decreases by the $10,000 per annum gifting allowance each year up to a maximum of $30,000 in a five year period as seen below:

Year 1 – Sam is 62 $90,000 gift applies
Year 2– Sam is 63 $80,000 gift applies
Year 3 – Sam is 64 $70,000 gift applies
Year 4 – Sam is 65 $70,000 gift applies
Year 5 – Sam is 66 $70,000 gift applies
Year 6 – Sam is 67 and applies for the Age Pension No gift applies. Sam’s ‘slate’ is wiped clean after 5 years and the gift will have no impact on his Age Pension

Because Sam gifted the money more than five years before he was old enough to apply for the Age Pension, he will not be affected by the gifting provisions.

Had Sam waited until he was applying for the Age Pension to gift the money, he would have been impacted less Age Pension each year comprising:

  • $7,020 or $270 per fortnight for the first year,
  • $6,240 or $240 per fortnight in the second year
  • and then $5,460 or$210 per fortnight for the next 3 years.

That’s a total of $29,640 less pension over the first 5 years, just because he waited rather than gifting early

 

The rules on loans and gifts

Loans

In essence Centrelink requires certain evidence to define your loan as a loan. This includes either a formal contract, or an email exchange, stating terms and conditions such as repayment amount and schedule, length of loan and any interest that will be paid. You also need to supply evidence of the current loan balance when you apply for the Age Pension. As loans are financial assets,  income is deemed from the current balance and the onus is on you to update Centrelink as the balance reduces over time . If repayments are not made or you do not update Centrelink, then the full balance is deemed under the asset rules on an ongoing basis.

Gifts

If, on the other hand, you gift money, you are not expecting it to be repaid. You can gift up to $10,000 per year up to a maximum of $30,000 within 5 years.

Here are the rules on these limits.

The limits are the same for singles and couples. The most you can gift without it affecting Age Pension payments is:

  • $10,000 in 1 financial year, or
  • $30,000 over 5 financial years – this can’t include more than $10,000 in any year

Amounts you gift in excess of these limits will:

  • count in your assets test, plus
  • have deemed income applied and this will be included in your income test for 5 years after the gift date.

If you change the status of a loan – say you loan money and then forgive the repayments, then this becomes a gift and the gifting rules apply from when the repayments are forgiven.

So do you lend or give money to the kids? Who would have thought there was so much to think about.

You can read more about gifting here and as always you can check your entitlements below.

 

Check Your Entitlements