Gifting rules, the age pension and the family home

Most of the library looks at family help from the buyer's side. This page is the parents' side: what a gift, a loan or a guarantee does to their own position, particularly if they receive or expect to receive the age pension, and what it means to draw on the home they live in to do it. The rules here are Services Australia's and the tax office's; how they apply to a particular couple is a question for their adviser.

Centrelink's gifting free areas

A person receiving a pension or other means-tested payment can give away up to $10,000 in a financial year, and no more than $30,000 across five financial years, without it affecting their payment. A gift above those amounts is not prohibited, but the excess is treated as a deprived asset: Centrelink keeps counting it as the giver's asset under the assets test, and deems it to earn income under the income test, for 5 years from the date of the gift. The money has gone to the child; the parents' pension is assessed as though it had not.

The free areas apply to the giver, and to a couple together, not to each recipient. Two children helped in the same year share the same free area. The rule also catches gifts that are not cash, such as transferring an asset for less than it is worth, and it applies to people not yet on a pension if they claim one within the five years.

For parents who are not, and will not be, receiving a means-tested payment, the free areas do not bite; there is no gift tax in Australia and the gift itself is not income of either side.

A loan is not a gift, to Centrelink either

Money lent to a child under a genuine loan agreement is still the parents' asset: it is a financial investment in their assets test, deemed to earn income whether or not interest is actually charged, until it is repaid. That is different from a gift, and it is one more reason the family decides which it is before the money moves. Forgiving the loan later is itself a gift on the day it is forgiven, with the free areas applying then.

A guarantee and the pension

A guarantee moves no money and, on its own, does not change the parents' assets or income for Centrelink's purposes. What it changes is risk: the guaranteed amount is secured on the parents' property and may one day have to be paid. Parents on a fixed income are the guarantors lenders look at most carefully, and some will not accept a guarantee from a guarantor with no income beyond the pension. The guarantor guide covers what is and is not being promised.

Drawing on the family home

The principal home is exempt from the assets test, which is why it is the asset most parents think of first. Turning its equity into help means borrowing against it, through a top-up of an existing loan, a new loan, a reverse mortgage, or the government's Home Equity Access Scheme, or selling and downsizing. Each has a different effect:

• Borrowing against the home creates a debt the parents service. The money raised and given to a child is a gift under the rules above; the debt stays with the parents.
• A reverse mortgage or the Home Equity Access Scheme defers repayment until the home is sold or the parents die, with interest compounding meanwhile. The amount available depends on age and the home's value, and the compounding reduces what is left in the estate.
• Selling and downsizing releases equity as cash, which is an assessable asset once it is no longer the home, apart from the tax office's downsizer contribution rules, which have conditions of their own.

Each of those is a decision about the parents' own retirement first and the child's purchase second, which is the order an adviser will take them in.

What it means for retirement income

A gift reduces the parents' assets and, above the free areas, does not reduce their assessed assets for five years. A loan keeps the asset on their books, deemed. A guarantee keeps the money but carries a contingent liability. Equity drawn from the home turns an exempt asset into either a debt or an assessable one. None of that says which is right for a family; it says what each does, which is what the parents' adviser needs to hear from them before the conversation with the child.

The professionals on this side

A financial adviser or a Services Australia financial information officer can model the pension effect of a gift or a loan before it is made. An accountant handles the tax side, including any interest received. A solicitor handles the loan agreement, the guarantee, the will and any equity-release contract. The buyer's lender is not the parents' adviser, and the buyer's broker is not either.