Gifting Assets to your Children: Here’s How Tax Applies

Thinking about gifting assets to your children? You might be hoping to give them a leg-up in life, or you might be in the middle of considering your estate planning arrangements and looking to reduce the chance of conflicts breaking out after you pass away.

Whatever the reason, it is common for parents to give cash, cars, and even shares and property to their children. But how tax is applied — and who it is applied to — differs depending on the asset type being dealt with. Here are a few things you should know before making any moves.

Cash and Cars

Assuming you are on solid financial footing, you might still be offering cash to your kids well into their adult years.  That might look like the occasional gift to help with groceries and rent, or it might be a much larger lump sum to help them purchase their first home.

Fortunately, your children won’t be expected to declare these amounts come tax time.  The ATO makes it clear that recipients don’t have to pay tax on cash gifts, no matter how large they are — so long as you can prove it is indeed a gift.

Transfer of a car is also exempt from capital gains tax, however your child might have to pay a small fee to transfer the registration of the vehicle to their name.  This typically must be done within 14 days of the car changing hands, otherwise a late fee will apply.

Shares

Here’s where things start to get a bit tricky.  When you transfer shares to your child, it triggers a capital gains tax (CGT) event.  This is despite the fact the shares are a gift and you don’t actually stand to gain any money.

To understand why, we need to consider the principle of ‘arm’s length.’  Parties are said to be engaging with one another at arm’s length if they’re unrelated and neither is exercising control over the other.

When the two people in a transaction are family members — and can’t be said to be dealing with one another at arm’s length — the ATO feels it has to pay extra attention in case someone is trying to offload assets without paying the appropriate amount of tax.

Because of this, the transaction will be treated as if you — the gift giver — received the market value of the asset from the recipient of the gift.  That means if the value of your shares has gone up, you will have to declare the ‘profit’ in your tax return for that financial year.

Having to pay tax on non-existent profit can be frustrating, but there are things you might be able to do to minimise how much you owe.

For starters, if you have shares that aren’t performing well you could consider selling them to offset the capital gain (or carry forward capital losses from previous years assuming you haven’t done so already). The CGT discount, which lets you reduce your assessable capital gain by 50% so long as you’ve held an asset for at least 12 months, can also help to reduce your tax bill.

Property

Similar rules apply when transferring property, in that a CGT event is triggered and you will be deemed to have received the market value of the property. But things are arguably a bit more complicated when calculating how much tax you will owe.

Because the market value of your property isn’t immediately apparent, you will need to arrange to have the property valued by a professional ahead of time. This will give the ATO confidence you haven’t undervalued your property to try to lower your tax bill.

There are, however, legal ways to minimise your tax burden.  These include working with your accountant to factor in your property’s cost base (that is, the cost of acquiring, maintaining, and disposing of it).  And as with shares, you might be able to benefit from the CGT discount if the property has been in your hands for at least a year.

It is worth mentioning your child might also have to pay stamp duty on transfer of the title, which can cost tens of thousands of dollars depending on the value of the property.

Does giving away assets have any implications for Centrelink?

If you receive the Age Pension, whether your payments are affected depends on how much you intend to give away, and your broader finances.  Under current rules, you are allowed to gift up to $10,000 in a single financial year and up to $30,000 over five financial years, without any amount of the gift being included in your assessable assets and income for Age Pension payments.

Any gifted amounts that exceed these thresholds may be included in your assessable assets and the excess value deemed for income test purposes for the next five years.  The assessment of gifts in excess to the exempt thresholds has the potential to lower your eligible rate of Age Pension payments.

In the end, you might decide it is better to address the transfer of assets in your Will.  Doing so can help to avoid CGT and stamp duty implications. 

If you wish to discuss the prospect of transferring assets to your children as a gift, or as a component of your estate planning arrangements, please contact our office to arrange a time to meet and discuss.