Many grandparents across Australia are keen to contribute in some way to the bringing up of their grandchildren. Often they act as mentors, perform babysitting duties, pass on their experience and generally act as a supportive role in times of need. Many also like to contribute financially where they can. But can contributing financially raise any issues? What should grandparents consider when looking at the options available?
Government Income Support and Gifting
If funds are passed directly to the grandchildren then gifting rules apply which may have an impact on Age Pensions or other benefits which are subject to an asset test. Government Income Support (GIS) recipients are allowed to gift up to $10,000 per financial year or $30,000 over a five-year period. Any amounts in excess of these thresholds will be treated as assets still owned by GIS recipients for five years, even though they will not receive any returns/earnings themselves.
For example, pensioners Heather and Kevvy have three grandchildren and wish to help with their education by giving each of them $20,000. In this case, giving $60,000 in any one year, to be split among three grandchildren, would mean that they have exceeded the $10,000 threshold and the excess of $50,000 will still be assessed against their Age Pension over the next five years. This may or may not be a major issue for them, but they can confirm the effect with a Centrelink or DVA Financial Information Service Officer.
As the excess is still counted, they will only receive a small increase in Age Pension (representing the allowable $10,000) by disposing of the assets, despite them not earning any interest/returns from that whole gifted amount as mentioned above.
If the grandparents hold the funds in trust for the grandchildren they will be ‘trustees’ and are therefore responsible for the funds. This also means that these funds will be assessed against their Age Pension under the assets test and deemed under the income test, just as they would be if they continued to own the funds themselves. They then need to decide whether to keep some of the earnings, if allowed by the trust, in order to maintain their cash flow.
Minors – Special taxation rules apply to Australian residential minors (unmarried and under the age of 18 at the end of the financial year) who generate ‘unearned income’. Currently (2011/2012), if a minor generates unearned income of more than $416 and less than $1308 in the financial year they are taxed at 66 per cent. If they generate $1308 or more, then the whole amount is taxed at 45 per cent. Unearned income includes dividends from shares and interest from investments/bank accounts. It does not include earnings from employment or from deceased estates. (This rule was introduced to deter adults putting large amounts in the ‘kids names’ to avoid paying tax on earnings at their marginal tax rate.)
Grandparents – If funds that are to go to the grandchildren are from the proceeds of shares, or even if the shares are transferred to the children/grandchildren, then Capital Gains Tax (CGT) would apply (unless the shares were acquired prior to 20 September 1985). They would need to allow for this if it results in a tax liability.
Different tax treatment for insurance/family bonds
An option which may or may not be appropriate is the potential use of an investment bond. This could be set up in their name or the children’s names. Child advancement policies, which may be an option on insurance bonds, allow them to nominate an age when the ownership transfers to the child. Investment bonds operate in a manner similar to a managed fund and are ‘tax paid’ if held for ten years. If the funds are not accessed in the first ten years, then those funds would not have a personal tax liability as the fund pays tax at the company tax rate (currently 30 per cent). Funds accessed prior to ten years would have tax consequences depending on the owners marginal tax rate at the time. If the funds are accessed in the first eight years then all earnings are assessable. If accessed in years eight to nine, then two thirds (2/3) of the earnings are assessed and if accessed in the ninth year, but before the tenth, then one third (1/3) is assessed. As the 30 per cent company rate applies, only the difference (between the company rate and their marginal tax rate) needs to be paid by the investor.
Gifting rules and potential CGT may still apply as mentioned above and available asset allocation options may or may not suit their needs and objectives.
Money passed through the estate
If they were to pass the money through their estate, it would continue to be assessed for GIS and taxation as you would expect, and unless the funds were coming from a taxable component within a death benefit super payout, there would be no tax liability for the beneficiaries. The problem here is that it’s difficult to anticipate when that event will occur and the grandchildren may need assistance prior to their grandparent’s death.
As you can see, it’s not always so simple and easy for grandparents to financially assist their grandchildren, or their own non-dependent children for that matter. If you are considering savings options for grandchildren it is important to check these issues to ensure it won’t be detrimental to you or the children.
Article written by Craig Hall, NICRI