What pensioners need to know about options to support children to purchase property

Australians are living longer, and the cost of buying a home continues to increase. Retirees and pensioners (for the purpose of this blog, referred to as ‘parents’) want to help their children buy a home but are concerned that providing this support could impact their pension and have appropriate accommodation in the future.

This blog will identify the three main ways that parents can assist their children to purchase a home, and the advantages and disadvantages of these methods of support.

Stamp Duty, Capital Gains Tax and the Age Pension

Before getting into the options parents have to support their children purchase homes, it is important to first touch on three key financial considerations that may impact a parent’s decision on how to provide this support:

Stamp Duty

When someone purchases or is transferred property, they must pay stamp duty of an amount to the State or Territory Revenue Office, calculated based on the value of the property when it was acquired. The value of the property for duty purposes, is generally the greater of the contract price or the real market value.

In some circumstances, there is a concession on the amount of duty payable by a purchaser, or a complete exemption. While the law in each State and Territory is different, generally concessions and exemptions are only available for first home buyers, or on transfers made as a result of a relationship breakdown (and the transfer is appropriately documented).

Capital Gains Tax (“CGT”)

CGT is a tax imposed on the disposal (being the sale or transfer) of certain property. The amount of tax payable is generally determined based on the difference between the value of the property when it was acquired and when it was disposed of, and allowable deductions (this is somewhat an oversimplification, but sufficient for the purpose of this blog).

The Income Tax Assessment Act 1997 (Cth) provides some exemptions or ‘rollover relief’ to having to pay CGT on the disposal of property. This may be an exemption because the property being disposed of was the person’s principal place of residence, or ‘rollover relief’ when a transfer is pursuant to a will or the administration of an estate, or pursuant to Court Orders or a Binding Financial Agreement as a result of a relationship breakdown.

The Age Pension

The age pension is a social security payment administered by Services Australia. A person’s eligibility to receive the age pension is determined by the Social Security Act 1991 (Cth), and generally requires that:

1. The person has reached a specified age, being 67;
2. The person’s income is less than the prescribed threshold; and
3. The person’s assets are less than the prescribed threshold.

If a person’s income or assets are greater than the prescribed threshold, they may still be eligible to receive a partial age pension. The amount they receive is generally reduced per dollar over the prescribed limit, up to a partial-pension limit, after which the pension amount reduces to $NIL.

More information about the age pension and eligibility can be found here.

It is important to consider how any money is given or property is transferred from an age pensioner to their child, as how this is structured can impact their pension. This will be expanded on below, however, unless properly documented:

1. If a gift is given (whether it be a gift of cash, a care or transfer of property) that exceeds the gifting rules outlined in the Social Security Act 1991 (Cth), currently $10,000 per year and $30,000 over five years, then Services Australia may consider the money or property gifted as still part of the pensioner’s assets when determining whether they meet the prescribed threshold;
2. If a loan is given, the ability to call on the loan may be considered an asset of the pensioner when determining whether they meet the prescribed threshold;

Support Options

Gifts

The option of providing a gift is as it sounds: parents gift their child either cash or a property, without any expectation of repayment. This may be done simply through a transfer of cash or formal change in title through the Land Titles Office, and can also be formally documented through a deed of gift.

The advantages of a gift are:

1. It is simple. Cash or the title of the property changes hands, and that’s it.
2. If the gift is cash (not property), there are no duty or CGT implications on the provision of the gift (unless the parent is selling property to gift the money to the child, which is not their principal place of residence).

The disadvantages of a gift are:

1. The gift could impact the parent’s ability to receive the age pension, if it exceeds the gifting thresholds of $10,000 per year and $30,000 over five years.
2. If the money or property was given on the basis that the child would provide for their parent in their retirement, there is no legal obligation to provide that support.
3. Where the person has multiple children and only one or some of the children receive gifts, it can create family tension and could result in them challenging the parent’s estate. This requires proper estate planning and Will drafting to ensure fairness is achieved.
4. If the gift is property (not cash), unless another exemption applies the child will need to pay stamp duty on the acquisition of the property through the transfer, at its market value.
5. If the gift is property (not cash), unless it is the parent’s principal place of residence, the parent would need to pay CGT on the transfer of the property to the child at its market value.

Practically, if the gift is the transfer of property, this will need to be formally documented through a transfer of title with the State or Territory Land Titles Office. If it were shares or a vehicle, the transfer ought to also be formally registered. With gifts of money, this could occur simply through the transfer of funds from one account to another. While a gift is relatively straightforward, for clarity, a documented and signed deed of gift would be recommended.

Loans

This option is also relatively self-explanatory: the parent provides a loan of a specified amount of money to their child for the purpose of funding the purchase of a home, and there is an expectation that the monies are repaid. This is generally (and should be) formally documented.

The advantage of a loan is:

1. There is no limit on the amount you can lend to a child.
2. Subject to the loan agreement, the parent will be able to recover the monies lent to the child, and may be able to call on the repayment in its entirety if needed and change interest on the money lent.
3. The repayment of the loan is enforceable by the estate of the parent, if they were to die before the amount was repaid. This potentially reduces family conflict and the risk of an estate challenge.
4. As it is the provision of money in exchange for a right to recover that money, there are limited, if any, stamp duty and CGT consequences attached to this option (unless the parent is selling property to gift the money to the child, which is not their principal place of residence).
5. Subject to the loan agreement, the parent may have some right to secure the repayment by registering a caveat or mortgage over the property purchased by the child.

The disadvantages of a loan are:

1. Subject to the loan agreement, the parent may not be able to call on the repayment of all the money lent to their child.
2. If the money was lent on the basis that the child would provide for their parent in their retirement, unless it forms part of the terms of the loan agreement there is no legal obligation to provide that support
3. The income from the repayment of the loaned amount and interest (if payable) and the ability to recover the loan amount would be considered by Services Australia for the purpose of the parent’s age pension.

Practically, if a parent were to provide a child with a loan, it ought to be formally documented in a way that resembles a commercial loan agreement, including elements such as repayment requirements, interest (if applicable), the rights of the parent to call on the loan, the ability of the parent to secure the repayment, and other standard and bespoke provisions relevant to the parent and child’s specific circumstances and agreement. It should also be signed, and records of the transfer of funds and repayment should also be clear, and kept for the life of the loan.

Granny flat agreements

A granny flat agreement is an agreement between a parent and child (usually), that the parent will gift the child either money for the purchase of a property or transfer a property to the child, on the condition that the child provides accommodation for the parent for their life. This is generally (and should be) formally documented.

The advantages of a granny flat agreement are:

1. The property subject to a granny flat agreement is somewhat flexible. It can either be at the property that is gifted (in the same house, or an actual granny flat on the property), or suitable alternate accommodation.
2. The parent has a guaranteed contractual right to ongoing accommodation support provided by the child, subject to the terms of the agreement.
3. Subject to the parent’s other assets and the value of the property being gifted subject to the granny flat agreement, it may not impact the parent’s age pension.

The disadvantages of a granny flat agreement are:

1. It is a complex legal arrangement that requires careful consideration and can be costly to establish.
2. The transfer of property may result in the parent having to pay CGT (if the property was not their principal place of residence) and the child having to pay stamp duty (unless an exemption applies, say because they are a first home buyer).
3. There may still be some impact to the parent’s age pension, subject to the value of the property being gifted and their other assets (it’s not 100%).
4. The arrangement needs to be accepted by Services Australia.

Practically, granny flat agreements should be formally documented through a contract between the parent/s and child, and signed. This is then the record, for the purpose of evidencing the arrangements with Services Australia, and in the event of a dispute arising in the future. The contract would outline not only the right to reside in the property/granny flat, but may also include provisions around the suitable alternate accommodation, what facilities the parent will have access to, who is responsible for the payment of utilities, maintenance and other expenses for the property, and any other rights and entitlements that the parent/s and child agree should be included and are relevant to their circumstances.

Common mistakes

Common mistakes people make are to proceed with any of the above arrangements without having received legal and financial advice, and without the arrangements being formally documented. This can lead to:

1. Services Australia not accepting that it is a genuine granny flat arrangement and the gift of property impacting the pensioner’s ability to receive the pension.
2. Gifts not being recognised as early inheritances in wills, or distributions in wills are not otherwise made considering gifts having been given, leading to the estate not being distributed to meet the parent’s intention on their passing, and disputes between families.
3. Loans to children not being recognised if a child separates, resulting in the parent not being repaid the loan amount, and it generally impacting how the child’s property with their spouse is divided on separation.
4. Loans being disputed when an estate is administered, resulting in the estate not being able to recover payment of the loan amount.

Why Balance Family Law?

The decision about how a parent supports their adult child to purchase a home, and how that child then ‘repays’ that parent for the support, whether financially or through the provision of other support, can be complex and the best option will depend on the individual family.

We have recently helped several families to document gifts, loans and granny flat arrangements, to meet their specific requirements. This includes:

1. Parents of pension age who where not eligible for the pension, but were concerned about what happens if they give money to their child and their child separates from their spouse. In this situation, re helped with a formal loan agreement.
2. A parent who had recently sold their house and gave money to their child to purchase a property, and they had agreed the parent could live there. This arrangement was documented through a granny flat arrangement.
3. A parent who wanted to give their children money for purchasing a property, one now and the others at different times in the future. We assisted in preparing a deed of gift for the current gift and also for the potential future ones, but also ensured that the parent’s will reflected circumstances where the gift was or was not given prior to their passing.

For personalised advice and expert assistance in deciding how to structure support provided by a pensioner parent to an adult child, contact us at Balance Family Law for the expertise you need to leave a lasting legacy for your loved ones.

Disclaimer

The information provided on this blog is for general informational purposes only. It is not intended as legal advice and should not be construed as such. The content of this blog may not reflect the most current law and legal developments and should not be considered an indication of future results. Balance Family Law makes no warranties regarding the accuracy of this blog and shall not be liable for any damages arising out of the use of the information contained. Legal issues are complex and unique to each case. Therefore, readers are encouraged to seek personalised legal advice tailored to their particular circumstances.