Here’s a detailed explanation outlining the advantages and disadvantages of lending or gifting
money to your adult children to help them purchase a home. I’ll also cover the relevant
considerations regarding taxation, superannuation, family law, Centrelink gifting provisions, and
cashflow implications.
Lending vs Gifting: Key Definitions
Before diving into advantages and disadvantages, it’s important to distinguish between lending and
gifting:
- Gifting: A transfer of funds without the expectation of repayment.
- Lending: Providing money under a formal loan agreement, which includes terms for repayment and interest (if applicable).
Each approach has distinct financial, legal, and tax implications.
Gifting Money: Advantages and Disadvantages
Advantages of Gifting
- No Repayment Obligations: Reduces the financial burden on your child, making
homeownership easier. - Family Assistance without Interest: No interest accrues, which avoids increasing their debt
burden. - Simple and Immediate: No need for complex documentation or ongoing management.
Disadvantages of Gifting
- Centrelink Implications (Age Pension): Gifting more than $10,000 in a single financial year (or $30,000 over five years) will reduce your assessable assets under the Centrelink means test for five years, which may affect your eligibility for the Age Pension.
- Impact on Retirement Income: Reducing your savings or investment capital to provide a gift may compromise your cashflow and long-term retirement income.
- No Legal Protection: If your child separates or divorces, the gifted funds may become part of the marital pool, leaving you with no recourse.
- Taxation: While gifts are generally not taxable for the recipient, there may be capital gains tax (CGT)
implications if the funds are linked to other investments. - The parents will also forego any investment returns or income that might have been earned
on the funds gifted.
Lending Money: Advantages and Disadvantages
Advantages of Lending
Control and Protection:
- A properly documented loan agreement can provide protection if the child’s relationship
- breaks down or if there are financial disputes.
The loan can be structured to be repaid gradually or only when the home is sold.
Flexible Terms:
- You can decide the interest rate (if any) and repayment schedule to suit your circumstances
and your child’s needs. - Potential Tax Deductibility (if structured correctly for investment properties): In some cases,
interest on loans may be deductible if the funds are used for investment purposes.
Disadvantages of Lending
Complex Legal Documentation:
- A loan agreement must be properly documented, ideally with the assistance of a lawyer, to
avoid future disputes. - Potential Family Strain: If financial difficulties arise and the child cannot repay, it may cause
tension.
Centrelink Implications:
- Even as a loan, the outstanding balance may be considered a financial asset under the
Centrelink means test, which can reduce your Age Pension. - Taxation: If you charge interest on the loan, this interest will be considered taxable income for you.
Superannuation Considerations
Preservation of Retirement Savings:
- Using funds from your superannuation to assist your children may reduce your long-term
retirement security. - Superannuation offers a tax-effective environment for retirement savings. Withdrawing
large sums to gift or lend could reduce your future earnings potential.
Family Law Considerations
Gifting Risks in Divorce Proceedings:
- A gift may be treated as part of your child’s marital assets in the event of separation or
divorce, increasing the risk that some or all of the funds will be lost.
Loans as Protected Assets: - A documented loan may be excluded from the marital pool if the loan is clearly defined and
enforceable.
Cashflow and Retirement Income Implications
Impact on Cashflow:
- Large gifts or loans will reduce your cash reserves, potentially impacting your ability to cover
unexpected expenses or maintain your lifestyle in retirement.
Opportunity Cost: - Money given to children may otherwise have been invested to generate income or capital
growth for your retirement.
Practical Strategies to Manage Cashflow Risks: - Set Limits: Determine how much you can safely gift or lend without compromising your
financial security. - Consider Partial Assistance: Instead of providing a large lump sum, assist with a portion of
the deposit or offer a smaller loan. - Seek Professional Advice: A financial planner can help assess how lending or gifting will
impact your overall retirement plan.
Conclusion and Recommendation
Gifting is simple and can greatly help your child, but it comes with significant risks regarding family
law, retirement security, and Centrelink implications.
Lending, if properly documented, provides more protection and flexibility but requires careful
structuring to avoid tax and legal pitfalls.
Next Steps:
Consult a Financial Planner: Assess your retirement strategy and determine how much you can
afford to gift or lend.
Engage a Lawyer: For lending arrangements, ensure a formal loan agreement is drafted.
Review Centrelink and Tax Implications: A specialist can guide you on minimising the impact on your
Age Pension or tax liabilities.
Should you require further information about gifting to adult children please feel free to contact
Peter Quinn by submitting an enquiry or calling us on +61 2 9580 9166 to book an obligation-free
appointment.
The information in this document does not consider your personal objectives, financial situation or needs, so you should consider its appropriateness regarding these factors before acting on it. It is important that your personal circumstances are taken into account before making any financial decision, and it is recommended that you seek assistance from your financial adviser.