Can I help my daughters by paying off their mortgages without the gifting rules applying to us?

Question 1:

I’m in my late 70s and about to receive $460,000 in compensation after developing cancer from asbestos exposure in the 1960s. My wife and I currently receive a full pension, we own our home, have two cars we bought for $60,000 five years ago, and our contents and personal items are insured for $120,000. We no longer have any money in super, but we have $15,000 in our bank accounts. I plan to pre-pay our funeral costs and help my daughters by paying off their mortgages. Given these circumstances, I’m hoping the gifting rules won’t apply to us. Is that correct?

Unfortunately, the source and reason for the compensation are not usually considered in Centrelink’s means testing. Social Security legislation states that if you have the means to fund your own retirement, even partially, this amount must be counted.

Within 14 days of receiving the payment, you’ll need to notify Centrelink. With $15,000 in savings, it’s also important to note that the value Centrelink applies to your fixed assets may be less than your stated amount. They typically assess personal effects and contents at “scrap value,” often around $10,000. Additionally, the car values should reflect what they might sell for privately, which might be around $15,000 for both cars given their age.

This means your total assessable assets could include $475,000 in banked funds plus $25,000 for cars and contents, totaling $500,000, which is $30,000 above the current asset test limit of $470,000 for homeowners.

For each $1,000 over this limit, your combined pension could reduce by $3 per fortnight. Without any adjustments, your pension might drop by $90 per fortnight. Pre-paying your funeral expenses, however, could bring you back under the asset limit for a full pension. You can also invest in a funeral bond fund, allowing you each to contribute up to $15,500 (or $31,000 total), potentially bringing you below the asset test limit. Essentially, this investment would “earn” you $90 a fortnight!

The “Gifting Rules” still apply, allowing you to reduce your financial assets by $10,000 per year and up to $30,000 over five years. However, any amount gifted will still appear on your records for five years, and this could affect you if future assets or there is a change in circumstances (such as one of you passing). That could mean a different asset test limit applies.

For this reason, it’s wise to have Centrelink record the gift as being from you alone, as the deprivation would disappear if you pass away. Additionally, rather than gift all the money away, you might consider keeping some funds reserved for future expenses, such as aged care.

Question 2:

I’m 66 and will turn 67 in December. I have just under $500,000 in super and would like to reduce the 17% “death tax” applied to my super when it’s passed to my estate. I’m considering withdrawing from my allocated pension, re-depositing it into my accumulation account as an after-tax contribution, and then starting a second allocated pension. Given my age, am I restricted to one year of non-concessional contributions, or can I bring forward three years of contributions (3 x $120,000 = $360,000)?

The tax you’re referring to applies only to the “taxable” component of a death benefit payment from super, not the total withdrawal. The exempt portion is always tax-free.

When the taxable component goes to an individual who is not financially dependent of the deceased (e.g., adult children), it’s included in their taxable income. With tax offsets, this tax is typically reduced to 15%. The additional 2% Medicare levy is also applied, which can sometimes be higher. It may also impact the beneficiary’s other income-tested benefits, such as paid parental leave, additional super tax, and family tax benefits.

However, if the super death benefit is paid to the estate instead of directly to the individuals, the Medicare levy is avoided, making the effective tax rate just 15% of the taxable component. In most cases, distributions from the estate to beneficiaries are not considered taxable income.

The recontribution strategy you refer to, is effective in reducing the taxable component and increasing the exempt portion. You may be thinking of the old rules, which restricted contributions for those over 67. In your case, you can utilise the full $360,000 bring-forward contribution cap up to age 75.

Lastly, you don’t necessarily need two separate Account-Based Pensions (ABPs). The original ABP could be combined with the new super contribution, allowing you to start a “consolidated” ABP.

For more money related questions, read more here.

IMPORTANT LEGAL INFO This article is of a general nature and FYI only, because it doesn’t take into account your financial or legal situation, objectives or needs. That means it’s not financial product or legal advice and shouldn’t be relied upon as if it is. Before making a financial or legal decision, you should work out if the info is appropriate for your situation and get independent, licensed financial services or legal advice.