Parking parents savings into offset

[albanga]

What are the taxation and legal considerations for parking your parents savings into your offset account.

Scenario being parents have no debt and 300k in savings, currently in everyday savings at say 3%. Instead of this they give/gift there savings to a child who puts this on their 5% home loan. The child then pays 4% interest to their parents. The result being a 1% positive each way.

Sounds fine In theory but no doubt comes with a host of issues?

 

[Terry_w]

Think of the 4 Disasters

1. Death
2. Divorce/family law
3. Bankruptcy
4. INcapacity

Consider what could happen if one of the above happened to either you or your parents.

Whatever you do it should be properly documented. So a loan is documented by a loan agreement, a gift by a deed of gift etc.

 

[Colin Rice]

Could work well if thought out and done properly.

I would say the ATO will want a slice of the parents 4% depending on their specific circumstances.

 

[Rob G.]

My concern ... but it doesn't seem to bother most people handling other people's money ...

There is usually an "all monies" clause in the bank loan contract in small print or it may be implied by your past dealings.

Quite simply, they may be able to claim the funds in the offset if you default on your loans.

If you made it clear that it was not your money by opening the account as trustee (ATF) then it may be technically a breach of trust law for you to get a financial benefit and also the bank may claim that a trust does not exist by your very actions. They could claim that it was merely a loan from your parents or that it is a mere gift by the non-commercial dealings.

At the very least, the funds may end up being paid into court pending the outcome of a costly dispute.

Better get legal advice and your parents should get independent legal advice about protecting their position.

 

[Jamie M]

Could work well if thought out and done properly.

Agreed - obviously it depends on the individuals and their relationship but I think this could work well for some. It's an offset so it's quite easy to transact from if the money needs to come out quickly.

Cheers

Jamie

 

[albanga]

Thanks for all the great replies.
Terry and Rob I would definitely seek legal advice if we decide this is something that we would like to pursue.

Colin and Jamie, I believe so as well. The goal is trying to create a win/win situation for both of us.

 

[marg4000]

If centrelink are involved in any way then that would have to be taken into account.
Marg

 

[Paul@PFI]

My concern ... but it doesn't seem to bother most people handling other people's money ...

There is usually an "all monies" clause in the bank loan contract in small print or it may be implied by your past dealings.

Quite simply, they may be able to claim the funds in the offset if you default on your loans.

If you made it clear that it was not your money by opening the account as trustee (ATF) then it may be technically a breach of trust law for you to get a financial benefit and also the bank may claim that a trust does not exist by your very actions. They could claim that it was merely a loan from your parents or that it is a mere gift by the non-commercial dealings.

At the very least, the funds may end up being paid into court pending the outcome of a costly dispute.

Better get legal advice and your parents should get independent legal advice about protecting their position.

Westpac require a sign off on offset accounts that funds are not held on trust and will never be held on trust. I signed one yesterday and wondered what it meant. Your explanation made it evident.

 

[Paul@PFI]

What are the taxation and legal considerations for parking your parents savings into your offset account.

Scenario being parents have no debt and 300k in savings, currently in everyday savings at say 3%. Instead of this they give/gift there savings to a child who puts this on their 5% home loan. The child then pays 4% interest to their parents. The result being a 1% positive each way.

Sounds fine In theory but no doubt comes with a host of issues?

If they receive any Centrelink benefits now or next 5 years or potentially may need aged care then there could be serious issues with this. They must declare all sources of income including being paid by a relative. That also leads to a tax issue for them if their total income is taxable.

 

[HomePage]

What's to stop someone doing something dodgy like formalising the loan agreement in writing as interest-free and payable on demand and leaving the remuneration arrangement as informal?

 

[speary]

The interest income would be assessable to the parents, but the interest expense would not be deductible to the child as the funds are borrowed to place in the offset and not for investment purposes.

 

[Terry_w]

The interest income would be assessable to the parents, but the interest expense would not be deductible to the child as the funds are borrowed to place in the offset and not for investment purposes.

I think the example above says the parents have cash, so they would incur no interest if that is lent interest free to the children. If it is interest free the parents would be recieving no income - centrelink may have deeming rates though - and therefore on the face of it, not income tax consequences.

Children would be using interest free loan to save non deductible interest so not tax consequences to them either, on the face of it.

 

[Peter_Tersteeg]

I don't know of the consequences or any of the arrangements that the parents and kids might have, but I've seen a lot of people with parents money in their own offset accounts.

Seems to me that perhaps the kids are ensuring that their (pensioner) parents fridge is always stocked. The parents never have trouble paying their power bill or visiting the doctor...

 

[albanga]

If they receive any Centrelink benefits now or next 5 years or potentially may need aged care then there could be serious issues with this. They must declare all sources of income including being paid by a relative. That also leads to a tax issue for them if their total income is taxable.

Mum is currently on a carers pension.
She spoke to centrelink and they advised the money in the bank would have a slight effect on her pension by around $50 a week.

So if Centrelink are made aware and make the appropriate adjustments is the only thing she would be required to do from a legal stand point is submit her yearly tax return and note the 7k in interest I pay her?

 

[Paul@PFI]

If income is under the threshold of $18.2K then a return may not be needed.

If Centrelink are aware of the income source then no issue until someone needs aged care assessment in some cases. $300k would be counted towards assets for aged care at that time.

Just make sure its acceptable to Centrelink / Human Services for pension income AND assets test and assets for aged care assessment. Ask all the right questions first.

Of course deeming applies to the $300K and the outcome of deeming counts to the income test which is why the pension may be adjusted by $50.

And then there are the estate planning issues...ie you go broke, divorce etc. Its a risk to them for just 1%. They end up being in same position as a guarantor. What they perceive as a deposit may in fact be at risk.

 

[albanga]

Thanks Paul
Just to clarify when you say "income stream" that would include her pension and the interest being paid as well?

And yes the estate planning issues raised by yourself and Terry would need much more consideration. It sounds like a classic "But it's mum, what is there to worry about" scenario but I am sure many people have had a similar outlook only to become divorced, killed.etc and the money sits in limbo.

 

[Paul@PFI]

Thanks Paul
Just to clarify when you say "income stream" that would include her pension and the interest being paid as well?

And yes the estate planning issues raised by yourself and Terry would need much more consideration. It sounds like a classic "But it's mum, what is there to worry about" scenario but I am sure many people have had a similar outlook only to become divorced, killed.etc and the money sits in limbo.

I said income source. You want Centrelink to accept that you have borrowed the funds.

 

[albanga]

Sorry Paul, nearly knock off time and I misread that.

Thank you for all your detailed responses.

 

[HomePage]

Of course deeming applies to the $300K and the outcome of deeming counts to the income test which is why the pension may be adjusted by $50.

If the parents have the $300K in the bank now then surely Centrelink is already deeming income from that asset. If so, loaning the money to the child shouldn't make any difference to their pension entitlement as the whole idea of deemed income is that Centrelink doesn't care whether you earn more or less than their deeming rate on that asset, regardless of where you "invest" it.