As older Australians look for ways to support their families without affecting their Age Pension, gifting assets like money or property can be a double-edged sword.
Many don’t realize that transferring large sums of money can result in a reduction in their Centrelink payment, even if the gift was made years earlier.
One strategy to avoid this is building a granny flat on your property, which can shelter your assets and help you retain your pension.
The Rise in Early Inheritances and Its Impact on the Age Pension
In recent years, gifting early inheritances has gained popularity due to younger Australians struggling to enter the property market. However, financial experts caution that cash gifting can have serious repercussions for your pension eligibility if not approached carefully.
Lawyer Suzanne Jones advises people to carefully consider the financial consequences of making large gifts, especially if they need aged care within five years.
How Gifts Affect Your Pension
Jones explains that if you give a child $250,000, and then unexpectedly require residential care within five years, the gifted amount will still be considered part of your assets for Centrelink’s asset test.
This means that the gift can count against you when calculating your eligibility for the Age Pension and other benefits.
A Clever Alternative: The Granny Flat Strategy
If you’re looking for a way to support your children without reducing your pension, building a granny flat could be the solution. This strategy allows you to gift your children a significant amount of money, without the gift being counted against your pension.
How Does the Granny Flat Strategy Work?
Noah Capozza, a financial advisor at Link Wealth Group, explains that building a granny flat allows you to transfer large sums of money to your family while minimizing the impact on your Centrelink benefits.
By constructing a granny flat on your property, you are essentially transferring assets in exchange for a “life interest” or the right to live in the flat for life.
The Popularity of Granny Flats
The popularity of granny flats has surged, with related search terms increasing by more than 50% in 2024.
This trend has been partly driven by the need for affordable housing options for adult children and parents seeking to protect their assets from Centrelink’s asset tests.
Financial Shelter: How Much Can You Gift?
The amount of money you can gift without it affecting your pension varies. Capozza explains that Centrelink may allow you to gift anywhere from $100,000 to $700,000 or even more, depending on the arrangement.
The key is that the gift will not be counted as an asset in the same way as a direct monetary gift would be.
The Reasonableness Test: How Centrelink Calculates the Value of Granny Flats
Centrelink applies a “reasonableness test” to determine how much of the gift is deemed as an asset. The test uses a conversion factor based on your age and the maximum partnered pension rate at the time the granny flat arrangement is established.
Example of the Reasonableness Test
Consider a scenario where Janice, aged 69, gifts her son $800,000 to build a granny flat on his property. The construction cost is only $150,000, and because the gifted amount exceeds the construction cost by such a significant margin, Centrelink applies the reasonableness test.
- Janice’s conversion factor, based on her age (70), is 17.36.
- The combined maximum partnered pension is $44,855.20.
The calculation:
$44,855.20 x 17.36 = $778,686.27
Janice’s gift is worth $800,000, but after applying the reasonableness test, only $21,313 is considered a gift for Centrelink purposes. This reduces the asset impact of the gift, helping her maintain her eligibility for the Age Pension.
Factors to Consider
While the reasonableness test provides some flexibility, it’s important to consult a financial advisor to understand how this may apply to your specific circumstances, as there are other factors to consider.
What If You Just Want to Gift Money?
If you’re simply looking to give money to your children, Centrelink allows you to do so. However, there are limits to how much you can gift before it impacts your pension.
According to Hank Jongen, spokesperson for Services Australia, you can gift up to $10,000 in a single financial year or $30,000 over a period of five years without affecting your pension. However, gifts exceeding these limits will be counted towards your assets.
Avoiding the Gift Trap
Jongen also warns against attempting to circumvent the rules. For instance, selling property to a child at a discounted price in an effort to avoid gift rules will not work. Centrelink will assess the difference between the market value and the sale price as a gift.
How Does Deeming Affect Your Centrelink Payments?
Deeming is used by Services Australia to assess the income from your financial assets, which is then added to your other income to calculate your Age Pension.
The government will look back over five years to check for any large gifts or asset transfers. If you made a large gift within this period, it could cause a significant reduction in your pension payments.
Building a granny flat is an effective strategy to gift money to your family while avoiding the reduction of your Age Pension. However, it’s important to understand the associated rules, including the reasonableness test and Centrelink’s gifting limits.
Seeking advice from a financial planner is essential to ensure that your decisions align with both your long-term goals and Centrelink’s regulations. By carefully planning, you can help secure your family’s future without compromising your pension.
FAQs
How much can I gift without impacting my pension?
You can gift up to $10,000 in one year or $30,000 over five years without it affecting your Age Pension. Gifts exceeding this limit will be considered in your asset test.
How does building a granny flat help with my pension?
Building a granny flat allows you to gift a large sum of money to your family while avoiding the asset test for Centrelink, as it provides you with a life interest in the property.
What is the reasonableness test?
The reasonableness test calculates the value of the gift in a granny flat arrangement based on your age and the maximum partnered pension rate. This helps reduce the impact of the gift on your pension.
Can I sell my property to my children at a discounted price to avoid gifting limits?
No, Centrelink will assess the difference between the market value and the sale price as a gift, which can affect your pension eligibility.
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