The Government’s Age Pension remains a vital source of income for many older Australians in retirement.
For example, in June 2018, 2,477,861 million people aged 65 and over received at least a partial Age Pension; this represented 64.15% of the total number of older Australians (3,862,591 million)*^.
Importantly, there are specific eligibility tests (age, residency, assets and income) that need to be met by older Australians to qualify to receive the Age Pension, in part or full.
In a similar vein to above, in our animation, ‘Intergenerational wealth transfer’, we discussed the importance of appropriately preparing your children for any wealth they may receive upon, or before, your passing.
Gifting and deprivation rules
When transferring (or gifting) wealth before your passing, it’s vital to consider the impact that this may have on you financially; this includes receipt of Age Pension entitlements, now and into the future.
For example, in terms of the Age Pension, gifting and deprivation rules can apply. These rules are designed to prevent you from reducing your assets or income to qualify for or increase your Age Pension entitlements.
In broad terms, gifting refers to the disposal (or deprivation) of assets or income, where no adequate financial consideration is received (where you get less or nothing) in exchange for the assets or income.
Allowable gifting amount
Whilst you are not prevented from gifting, there is an allowable gifting amount (or ‘gifting free amount’), which if exceeded can impact your Age Pension entitlements – through the application of the deprivation rules.
If you (or your spouse) gift assets in excess of $10,000 in a financial year, or $30,000 over any rolling 5 financial year period, the excess is assessed as being a ‘deprived asset’. This deprived asset is counted as an asset in your assets tests, and subject to deeming in your income test, for 5 years from the date the excess gift was made.
Although, if during the 5 year period, you receive adequate financial consideration for a gifted asset, or it’s returned to you, then the value ceases to be assessed as a deprived asset from the date of the return or the adequate financial consideration being received. However, upon this occurring, the asset is counted as an asset in your assets tests, and subject to deeming in your income test.
Please note: Depending on your personal circumstances, gifts made during the 5 year period before claiming the Age Pension may also be considered.
Examples of gifting
Although not a full list, here are examples of what may be considered gifting for deprivation purposes:
- donating to a charitable organisation,
- paying for your grandchild’s education costs,
- giving money to your child for their wedding,
- waiving your right to an interest in a deceased estate,
- purchasing Christmas and birthday presents for a non-dependent child,
- selling your residential investment property to your child for less than market value,
- repaying, whether voluntarily or involuntarily, your child’s loan where you are the guarantor.
Whereas, again not a full list, here are examples of what may not be considered gifting for deprivation purposes:
- spending money on travel and holidays,
- buying or replacing your household items,
- transferring assets between yourself and your spouse,
- renovating or making improvements to your family home,
- putting money into a special disability trust (conditions apply),
- paying for your child’s wedding for which you are hosting and attending,
- transferring a house for less than its value, if you get a right to live there for life (granny flat interest).
Disposal (or deprival) of income
If you dispose of income without disposing of an asset, then the allowable gifting amount doesn’t apply; the income disposed of is counted as income for Age Pension purposes for as long as the disposal of income takes place. However, upon cessation of this, the income is counted as income in your income test.
An example of disposal of income without disposing of an asset can be forgoing a contracted superannuation pension increase or forgoing a private annuity payment.
When it comes to gifting, it’s important to understand that this can also impact your aged care costs and fees payable. For example:
Home Care Package, in terms of your income-tested care fee, and
Residential Aged Care, in terms of your means-tested care fee and accommodation fee.
Following on from the concept of transferring (or gifting) wealth before your passing, it’s vital to consider the impact that gifting assets or income may have on you financially, including receipt of Age Pension entitlements.
Although you may wish to help a friend or family member financially, you need to consider whether you can afford to do so. For example, after gifting, will you still be able to meet your needs, now and into the future?
If you have any questions regarding this article, please do not hesitate to contact us.
Source: PWSFinancial Knowledge Centre
* Australian Government, Department of Social Services. (2018). DSS payment demographic data.
^Australian Government, Australian Bureau of Statistics. (2019). Australian demographic statistics data.