Gifts or Family Loans
Theses days, it is very common to see both parents and grandparents assisting younger family members when it comes to arranging a deposit on a house, mortgage and private education costs. In many ways it may be more opportune to provide this assistance now, when help is most needed, rather than providing for your family in your will or estate.
There are a number of things to be borne in mind however:
- Centrelink gifting rules provide that a single person, or a couple, can only give away assets up to $10,000 during a financial year or $30,000 over a rolling five-year period. If these limits are exceeded then the excess will be considered as a "deprived asset" - and under the pensions assets test this amount continues to form part of your assets for a period of five years from the date it was gifted. Under the income test, the deprived asset is also assumed to earn a deemed rate of interest for a period of five years. This doesn't mean that gifting cannot be tax effective, but this should be the subject of specific tax advice.
- Very importantly, you need to bear in mind that your circumstances may change, particularly given that retirement can span a period of 20 to 30 years - and a generous act may have a potentially significant impact on your retirement position. Remember that if you are in retirement, or close to retirement, you normally have limited or no ability to make up for a loss of capital.
- Generosity within a family, focussed on individual members for very good reasons, may nonetheless be very de-stabilising - with other family members concerned about preferential treatment.
One alternative is to consider a loan from yourselves to family members, structured properly as a legal agreement. Many people find themselves uncomfortable with the notion of legal agreements within a family context, but we think that care taken at this stage - particularly to clarify the nature of any arrangement - is probably less likely to cause problems at a later stage than the informal, poorly enunciated and communicated arrangements that are characteristic of families and often constitute a "ticking bomb".
We don't disregard the problems attaching to recovering money at some later stage, if it comes to that, but you will be better off with a clearly written agreement than the informal arrangements that give rise to so many problems within families over estate matters. So, at a minimum, draft your own loan contract and if the money is substantial, have a solicitor draw it up for you. This is not being unsentimental, it is incumbent on you to manage your affairs properly – for everyone's benefit, including yourself.