Jonathan Armitage is the Chief Investment Officer at MLC. Jonathan assumes overall responsibility for the investment outcomes of the MLC portfolios.
Centrelink gifting and deprivation rules have been designed to prevent people from giving away assets or income over a certain level in order to increase pension and allowance entitlements.
This article is for educational purposes only and is no longer available for CPD hours.
Gifts made in excess of certain amounts are treated as an asset and ‘deemed’ as a financial investment under the income test for a period of five years from disposal.
What are the gifting limits?
The gifting rules do not prevent a person from making a gift to another person. Rather, they cap the amount by which a gift will reduce a person’s assessable assets for means testing purposes.
There are two gifting limits which apply to a single person or to the combined amounts gifted by a couple:
Up to $10,000 each financial year; and
A limit of $30,000 over a five financial year rolling period.
The $10,000 and $30,000 limits apply together. That is, although people can continue to gift assets of up to $10,000 per financial year without penalty, they need to take care not to exceed the gifting free limit of $30,000 over a rolling five-year period.
Fred, a single pensioner, has financial assets valued at $400,000. One of his objectives is that he would like to help his adult daughter, Linda, and grandson, Yannick, financially. He plans to make the following gifts as outlined in Table 1.
Under this gifting plan, Fred has not exceeded either gifting rule. This is because he has kept under the $10,000 in a single year rule and also within the $30,000 per rolling five-year period. In fact, Fred could have gifted $6,000 per financial year over this five-year period and not be caught under either rule.
This results in Fred’s assessable assets falling by $5,000 per annum or $25,000 over the five-year period.
What happens if the gifting limits are breached?
If the gifting limits are breached, the amount in excess of the gifting limit is considered to be a deprived asset of the person and/or their spouse.
The deprived amount is then counted by social security for five calendar years from the date of gift, during which time it is assessed as an asset for asset test purposes and subject to deeming as a financial investment under the income test.
After the expiration of the five-year period, the deprived amount is neither considered to be a person’s asset nor deemed.
Meryl is eligible for the Age Pension. She has given away the following amounts as outlined in Table 2.
Deprived asset assessed using the $10,000 in a financial year free area rule
Deprived asset assessed using the $30,000 five-year free area rule
In this case, $10,000 of the $20,000 given away exceeds the gifting limit for the financial year, so it will continue to be treated as an asset and subject to deeming under the income test for five years from the date of the gift.
It does not matter in this case that Meryl has not exceeded the rolling $30,000 limit as the $10,000 financial year limit has been breached.
Barry is eligible for the Age Pension. He has given away the following amounts as outlined in Table 3.
Gifts over five years
In this case, although Barry never exceeds the $10,000 limit in any given financial year, he does exceed the rolling $30,000 limit in years four and five. If he continues to gift in the 2020/21 financial year and onwards, this will result in further deprived assets.
What is considered a gift?
For the deprivation provisions to apply, it must be shown that a person has destroyed or diminished the value of an asset, income or a source of income.
A person disposes of an asset or income when they:
engage in a course of conduct that destroys, disposes of or diminishes the value of their assets or income, and
do not receive adequate financial consideration in exchange for the asset or income.
Adequate financial consideration can be accepted when the amount received reasonably equates to the market value of the asset. However, it may be necessary to obtain a valuation from the Australian Valuation Office.
Alena, who is eligible for the Age Pension, sells an investment property valued at $500,000 to her son Boris for $300,000.
Although Boris has paid for this asset, he has not paid the full market value. This will result in $200,000 being treated as a gift from Alena.
For Centrelink purposes when calculating Alena’s payment, $190,000 (the amount in excess of the $10,000 limit) will be assessed as an asset and subject to deeming for five years from the date of the gift.
It should also be noted that the deprivation rules will also apply where the asset gifted is ordinarily exempt under the assets test, such as a principal home.
Further, should an exempt asset (such as the principal home) be gifted, not only will the excess portion of this gift be assessable as an asset, it will also be deemed as a financial asset for the five-year period. So, not only has this previously exempt asset become assessable under the asset test, it has also caused an income test assessment due to the deeming provisions being applied.
Are some gifts exempt from the rules?
Certain gifts can be made without triggering the gifting provisions. Broadly speaking, these include:
Assets transferred between members of a couple. A common example is where a person who has reached Age Pension age withdraws money from their superannuation and contributes it to a superannuation account in the name of their spouse who has not yet reached Age Pension age.
Certain gifts made by a family member or a certain close relative to a Special Disability Trust.
Assets given or construction costs paid for a ‘granny flat’ interest.
Gifting prior to claim
Any amounts gifted in the five years prior to grant of payment are also subject to the gifting rules.
As an example, a client who gifted $100,000 four years before their application for Centrelink/DVA will have a deprived asset of $90,000 for the first year of their income support payments (i.e. the one remaining year of the five-year deprivation period).
Having said that, the deprivation provisions will not apply when a person has disposed of an asset within the five years prior to grant, but they could not reasonably have expected to become qualified for payment. For example, where a person only qualifies for a social security entitlement after the unexpected death of a partner or job loss.
Gifted assets that are returned
Where a person disposes of an asset, and the asset is later returned to the person, it may be appropriate to consider whether the disposal actually occurred in the first place.
Where a disposal of assets is taken to have occurred, and the assets are returned to the person, any deprived amount ceases to be assessable from the date the asset is returned to the person.
Gifting and deceased estates
The gifting rules apply to a person’s interest in a deceased estate if the person does any of the following:
Gives away their right to their interest in a deceased estate for no/inadequate consideration;
Directs the executor to distribute their interest in a deceased estate for no/inadequate consideration; or
After the estate has been finalised, gives away their interest in a deceased estate to a third party for no/inadequate consideration.
The above rules apply even if the deceased died without a will and the estate is administered based on the relevant state intestacy formula.
Gifting and relationship breakdown
When a relationship breaks down, there is often a property settlement to sort out which assets will belong to each party.
When a person gives away assets as a result of a court order or property settlement following a relationship breakdown, the value of the assets given away will not be treated as a gifted/deprived asset. That’s because satisfying the demands of a court order or property settlement is regarded as adequate consideration for the asset.
However, assets gifted prior to the separation that resulted in deprivation also need to be considered. Now that the couple have separated, how will the deprived assets be assessed for each person?
This depends on who legally owned the asset at the time the gift was made, as demonstrated in Table 4.
Table 4: Deprivation and relationship breakdown
Legal owner of the deprived asset
Assessment of deprived assets
– does not change for either partner.
– 50% of the value of the asset or income continues to be held against each person.
By one partner
– becomes fully held against the partner who owned the assets or income.
* Both joint tenants and tenants-in-common ownership.
Gifting and death of a partner
In some circumstances, couples in receipt of a social security benefit may give away assets prior to the death of one of them.
Prior to death, any deprived assets would have been assessed against the pensioner couple for five years from the date of the disposal. Now that a member of the couple has passed away, how will the deprived assets be assessed for the surviving partner?
The amount of deprivation that continues to be held against a surviving partner depends on who legally owned the assets prior to death.
Table 5: Gifting and death of a partner
Original legal owner
Half of the asset value of the deprived asset will be assessed against the surviving spouse.
No amount will be assessed against the surviving partner.
The full amount will continue to be assessed against the surviving partner.
* Both joint tenants and tenants-in-common ownership.
The difference between gifting and a loan?
In some cases, an income support recipient may choose to help out a child/grandchild by loaning money to assist with a home purchase or starting a business. A loan made by an income support recipient is not considered a gift, but is a financial asset and subject to the deeming provisions for the income test. From a Centrelink point of view, there is no compulsion that the loan terms are on a commercial ‘arms-length’ basis.
The impact of a loan will generally have no effect on an income support recipient’s asset position, except in the case the funds have been drawn from an exempt asset. Two common examples are superannuation accumulation for clients under Age Pension age or a line of credit against an income support recipient’s principal home.
Graham, aged 66, has redeemed his $30,000 term deposit and loaned this money to his son, Stuart.
This will have zero impact on Graham’s Age Pension, as the $30,000 has moved from one financial asset to another – term deposit to loan.
What if Graham took out a $30,000 loan against his home and then on lent the money to Stuart?
This changes Graham’s assessment, as he has used a non-assessable asset in his home to release $30,000, which is an assessable asset in the form of the loan to Stuart. This $30,000 loan will count as an asset for Graham and will be deemed in his income test calculation.
Whilst a loan made by an income support recipient is not classed as deprivation, the forgiveness of a loan/debt can be. In the above example, if Graham decided at a later stage to forgive this $30,000 loan to Stuart then he would have a deprived asset of $20,000 ($30,000 less the $10,000 financial year limit). This $20,000 will be carried forward as a financial asset for five years from the date the loan is forgiven.
If Stuart did not require the $30,000 at one time, Graham could consider gifting the $30,000 in $10,000 increments over three financial years, as outlined in Table 6.
Based on this example, Stuart would have his $30,000 over a period of approximately 14 months with no deprivation. Graham would also have his Centrelink asset position reduced by $30,000 over the 14-month period.
If Stuart needed the entire $30,000 immediately, then Graham could consider a combination of gifting, a loan and forgive part of the remaining loan over the following two financial years, as outlined in Table 7.
* The $10,000 partial forgiveness of the loan in the 2016/17 and 2017/18 financial years will be assessed as a gift, however, as Graham does not exceed $10,000 in any one financial year, he does not trigger any deprivation. Graham also stays within the $30,000 over five year limit in this example. The $30,000 is again completely removed from Graham’s asset base in approximately 14 months, compared to giving the entire $30,000 in June 2016 and having a $20,000 deprived asset for five years.
Gifting and the 1 January 2017 asset test changes
In June 2015, changes to the Centrelink asset tests commencing 1 January 2017 were legislated.
Gifting may be a potential solution for some income support recipients affected by these measures. It is important, however, that the gifts are in line with the client’s goals and objectives and they understand the long-term impact this reduction in asset base may have on their standard of living in retirement.
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