Sharing property with your children and forgiving loans

Bill wants to help his daughter purchase a property and wants to know how sharing will affect his pension. He also has a question about an outstanding loan.

Q. Bill
My wife and I are in our late 60s and have been on a part Age Pension for a couple of months. We have been considering moving to the central coast of NSW along with our daughter, her husband and two children. We would likely have more money to buy a property than they would. What are the Centrelink rules around shared properties? If we bought a small property with two dwellings, would that impact our part pension?

Also, I have a defined benefits pension, hence the reason we only get a part Age Pension. We also have a business that lost well over $350,000 before I returned to a paid job about four years ago. I had intended to work until I was 70 to recover losses but then I had a quad bypass last year.

Read: Ten reasons wealthy homeowners shouldn’t receive the pension

Centrelink has considered the loan to the business to cover losses as an asset and deemed income against the $350,000, thus reducing our part pension further. The trouble is that money simply isn’t recoverable as the business has no income and no prospects of earning. 

The business has no assets other than two old cars with a market value of about $20k. We have a mortgage against our house for a similar value to what we lent to the business but Centrelink hasn’t considered this. Much of the money lent to the business was lent over five years ago.

A. To answer the first part of your question, if you were to build two dwellings on the same property and pay for all of the second property yourself, then that property would be considered an asset and would affect your pension payments.

Read: Age Pension increase to be ‘wiped out’ by rising costs

However, if your daughter pays for all or part of her dwelling, then only the part that you own will be assessed as an asset.

You can also consider a granny flat arrangement, which may help in this situation.

A granny flat interest is an agreement for accommodation for life and can help transfer assets to your children without risking your pension payments.

Read: How selling and downsizing affect your pension

A granny flat interest or right is where you pay for the right to live in a specific home for life. Often this may include signing over the title of a property you own to a family member, but can also be used as a way to pass assets to a child without triggering gifting issues.

You create a granny flat interest when you exchange assets, money or both for a right to live in someone’s property for life.

You can read more about a granny flat interest here.

With regards to the loan, a loan no longer exists for income support purposes when it has been forgiven. If you forgive a loan, this means that there is no longer any expectation that the money will be repaid to you. 

Forgiving a loan will lead to the loan amount being regarded as a gift.

A gift is any money or property that you give away for which you do not receive adequate financial consideration. 

Gifts affect your pension or payment because they either directly or indirectly reduce the assets available for your personal use.

The maximum amount you can give away, regardless of whether you are a single person or a couple, is $10,000 per year, or $30,000 over a rolling five-year period.  

If you give away more than $10,000 in a financial year, the amount in excess of $10,000 is counted as a financial asset for five years from the date that you gave it away. This excess amount will also be deemed to be earning income under the income test for the period of five years from the date that you gave the asset(s) away.

Forgiving the loan will affect your pension in the short term, but after five years the money will no longer count as an asset and your pension will actually increase.

As both of these issues involve quite complicated financial decisions, you should consult with a financial adviser and/or legal expert about the best course of action in your particular circumstances.

Do you have a granny flat interest with your adult children? What advice would you have for Bill? Why not share your thoughts in the comments section below?

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Disclaimer: All content on YourLifeChoices website is of a general nature and has been prepared without taking into account your objectives, financial situation or needs. It has been prepared with due care but no guarantees are provided for ongoing accuracy or relevance. Before making a decision based on this information, you should consider its appropriateness in regard to your own circumstances. You should seek professional advice from a Centrelink Financial Information Services officer, financial planner, lawyer or tax agent in relation to any aspects that affect your financial and legal circumstances.

Written by Ben