The art of gifting to your kids

Parents increasingly want to help their offspring now – whether it’s for education, setting up a business or buying a property – rather than through an inheritance that could be decades away.

The desire many parents have to help their children financially doesn’t suddenly disappear when their kids turn 18. Financial support is often ongoing, and it can take many forms, from allowing adult children to live at home rent free to helping with education costs.

For some, that help goes even further. Thanks to the soaring cost of buying a home in Australia, it’s not uncommon for parents – if they can afford it, of course – to chip in for a deposit or to cover the cost of lenders mortgage insurance to help their kids get a foot in the door.

Helen Baker, a financial adviser and founder of On Your Own Two Feet, says that gifting money is one solution for parents or other family members wanting to help out in the present rather than leaving money in a will that may not flow through for decades.

Gifting between generations is on the rise. Research published by the Productivity Commission in December 2021 found that between 2000 and 2019, the value of money gifted by Australia parents tripled from roughly $4 billion to $12 billion a year.

How much can you gift?

As Mark Chapman, the director of tax communications at H&R Block explains, the good news for anyone thinking about gifting money is that if it is a genuine gift, there will be no tax to pay.

“If you are simply giving cash, there are no tax implications for either the giver or the receiver of the gist and there is also no limit to the amount that can be gifted. You may be called on to prove that cash is a genuine gift, though.”

“An example might be receiving a ‘gift’ from parents, and at the same time agreeing to give up certain rights in the family company. The parents or the child might argue that the two are unconnected and that the payment is a genuine ‘gift’, but the ATO may connect the two events and argue that the ‘gift’ is really consideration for giving up the rights and, therefore, taxable as a capital gain.”

The equation becomes a bit trickier for anyone receiving the aged pension or government assistance, though, because any amount gifted over the following limits (for either singles or couples) may affect their payments: up to $10,000 in one financial year or up to $30,000 over five financial years.

“If the value of your gifts exceeds these limits, the excess amount will still be included as your asset in the assets test,” says Chapman. “You will also be deemed to be earning income from the excess amount as part of your income test for the next five years.”

When it should be a loan

Gifting money is without a doubt a generous act, but it’s not without its pitfalls. Once common cause of concern for parents wanting to gift their children money to help buy a home is what happened to that money if their child is in a relationship and it breaks down.

“It’s a fairly common issue that arises in property where a relationship ends, parties can’t agree and then things become litigious,” says Matthew Kinder, a director at Meillon & Bright Legal.

“Often the interpretation of money provided becomes very different after the fact. So, someone might say that the money provided by someone’s parents was a gift and it was never intended to be repaid. If there’s no document to support that it was a loan, it can then become a hotly contested issue.”

As Kinder notes, one of the potential safeguards available to anyone providing a gift in this scenario is to make that money a loan rather than a gift.

“The safer path if parents are intending on having the money returned to them, or kept in the family, is for it to be via a loan,” says Kinder.

“In that sense it should be looked at as if it was any other commercial loan. So, it should be documented in writing, it should specify what the amount is, what the purpose of the loan is, and it should specify a rate of repayment. If you were going to borrow money from a bank, you’d be charged interest, so for it to be a real loan agreement there should also be a rate of interest charged on repayments.”

Can property or shares be gifted?

While it’s possible to gift assets like property and shares, they do come with added complications and costs. Here are three considerations from tax expert Mark Chapman.

• Watch out for capital gains tax

“CGT is not an issue for cars (which are exempt), but it is likely to be for gifts of both shares and property. So, if you decide to give shares or property, the giver will be subject to CGT and the disposal – and if gifting to children (or other family), the asst will be deemed to have been disposed of at its market value, which could trigger a hefty CGT bill.”

• Record the market value

“If gifting share or property, make sure you know what the market balue of the asset is on the date of the gift. That’s not difficult for shares listed on the stock exchange – you can simply look up the value of the shares that day online – but for private company shares or real estate, you may need a professional valuer to give you a written valuation.”

• Make use of any concessions

“If you decide to pass on the home you are living in, perhaps spurred by a tree change or a desire to downsize, you may be able to use the main residence exemption to reduce or eliminate your CGT bill.”

Credit: Excerpts taken from ‘The art of gifting to your kids’ by Tom Watson, Money Magazine February 2023 edition.

If you are considering gifting your children and would like guidance, please contact our team today.