Gifting or lending to relatives interest-free

[Tri2008]

Can anyone explain to me how gifting or lending to relatives interest free can reduce income tax liabilities?

Quoted article from SMH:
"By gifting or lending money interest-free to relatives, the donors reduce their personal income tax liabilities. If the gift was made five years or more previously they will also reduce their assets subject to the age pension asset test.

The benefit to the children is the saving in mortgage interest from having a lower level of debt. This benefit accumulates at compound interest free of tax over the life of the mortgage, allowing the debt to be repaid more quickly.

An added benefit of helping to reduce the size of the mortgage is the higher return available to the family. Invested in a term deposit, current interest rates would not be more than 3 per cent a year taxable. Even at the lowest 19 per cent tax rate, the return would be only 50 per cent of the interest saved by reducing the size of the mortgage.

Now that interest rates available to investors are low and likely to fall further, assisting the family to achieve home ownership is an increasingly attractive option.

The government could help families likely to need as much as they can find for their own retirement to provide temporary assistance to their children by changing the 1993 ATO ruling on mortgage offset accounts to allow relatives to open mortgage offset accounts against the mortgages of owner-occupier children."

Link --> http://www.smh.com.au/money/borrowing/keep-it-in-the-family-for-a-winwin-20150404-1mch92.html

 

[Terry_w]

I often use gifting and/or loans to related party type strategies.

Generally you wouldn't want to gift to a relative because
1. You lose control
2. The recipient is likely to lose the money through divorce, bankruptcy, stupidity.

But a person may want to gift for asset protection reasons - to keep the money from falling into the hands of creditors for example.

A solution may be to gift to a discretionary trust which then lends the money to the relatives - at commercial or nil interest rates depending on the circumstances.

For tax reasons you would find there is an advantage in having someone on a low income earn income from investing as it will be taxed less.

An example may be a stay at home spouse with no income and the other spouse on the top marginal rate. Spouse with no income might be able to lend the other spouse money to buy a negatively geared property. Interest income to spouse A may be taxed, but possible spouse A is under the threshold so it may be tax free. Spouse B may be on the 47% tax rate so may save 47% of the interest incurred.

Naturally there are many issues with this and you need both legal and tax advice.

 

[Tri2008]

Thanks Terry, I would suggest the author should give as much details and explanations as you do

 

[Terry_w]

I read the article after I posted - pretty lame wasn't it. Targeted for the masses.

 

[Paul@PFI]

The article discusses Centrelink pension recipients. Centrelink determine eligibility to pensions based on two tests.
1. Asset test
2. Income test
For the purposes of the income test special rules may explain how "income" is calculated. ie interest free investments are subject to deeming, super pensions etc.

Many retiree structure themselves in the 5 years ahead of the age pension to pass these tests.

Pension recipients cant gift or lend interest free without a potential impact however for someone approaching pension age there are strategies that may get their assets down by gifting to their younger spouse. (ie they mention the five year gifting rule). This then means they earn less so their pension may increase (or become available).

The gist of the article suggests that older retirees should be allowed to park savings in their relations offset account (or a third party offset ??). Many may disagree as it doesn't mean they will earn income, have any security over their savings and the capital may be at risk. There is only a benefit if the offset balance is a income generating investment for the retiree. So it disguises the "benefit" to the homeowner. (eg Paying 4.5% to the retiree v's the bank is no improvement). So if there is no benefit who wins ??

This poses a serious risk to retirement incomes and savings and is a common request of the younger entitled generations. It seem a real risk to estate planning as well. The apparent simplicity belies real problems.

These articles always seem to be written from the perspective of the homeowner. There are many retirees who wouldn't even consider lending or entering into such arrangements if it could mean loss of retirement savings. Its a estate planning nightmare in the making for some families. A low earning rate in TD's may be a better risk than assisting an adult child who then squanders the offset or loses the lot in a marital dispute..

This is a complex area of financial advice intended for person aged 60+