5 Things To Know About Gifting and Inheritance Taxation
Giving gifts is a time-honoured tradition that is enjoyed by people of all ages. Whether it’s a birthday, holiday, or just to offer your appreciation, giving gifts is an excellent way to show your loved ones how much you care. And while there’s no doubt that everyone likes to give gifts, no one thinks about the potential tax implications of giving that gift.
If you’re gifting money or property to a family member, and the receiver starts producing income as a direct result of that gift, there may be certain tax implications you need to wrap your head around. Inheritance taxes work in a similar way—if you’re inheriting money or property from a family member, there may be taxes due, depending on how the asset is used.
It’s always best to seek advice from a tax professional when wondering how to pay tax on gifts and inheritances to ensure you comply with the law and avoid any unexpected tax bills.
In this article, we’ll answer, ‘what is gift tax in Australia?’, and help you navigate the basics of both gift and inheritance tax, so you know what to expect in either situation.
1. The ATO Defines Gift Giving According to Specific Criteria
The Australian Tax Office website (ATO) defines a gift in Australia as:
- A transfer of money, property or shares (including cryptocurrency),
- That was voluntarily made,
- Where the gifter doesn’t expect any payment in return, and
- Where they don’t materially benefit from giving the gift to the receiver.
2. What is Gift Tax in Australia and How Does it Impact Your Assessable Income?
The term “gifting tax” is confusing, given there is technically no such thing as a gift tax in Australia. In other words, if you’re receiving or giving money to a family member or friend, the ATO doesn’t consider the value of that gift as part of your taxable income.
For example, you might consider paying school fees as a gift for your grandchildren, or you might want to deposit money into your daughter’s bank account for her birthday. Either way, regardless of the type or value of the monetary gifts, you don’t have to declare them on your annual income tax return.
There is, however, one exception to this rule: when the gift produces income for you, such as rental income or interest income.
Megan’s mum gifted her with $12,000 for her 30th birthday. Typically, Megan wouldn’t have to pay tax on receiving that gift. However, she decides to deposit the money into an interest-bearing savings account so that she can start saving up for a European holiday.
As Megan will be earning interest from the gift, she must include the interest income in a tax return as the ATO considers this assessable income for tax purposes.
3. Capital Gains Tax Implications May Apply to Gifted Properties, Shares and Cryptocurrency
While income tax might not necessarily apply to cash and other gifts (unless it turns into an income-producing activity), capital gains tax (CGT) may apply to the gifter or donor if the gift classifies as either property, shares, or cryptocurrency.
Similarly, if the receiver disposes of the gift, they may also incur a CGT liability.
In Australia, CGT is a tax levied on the profit realised from selling certain assets. The most common asset subject to CGT is real estate, but other assets such as shares, collectibles, and business assets can also be subject to CGT. When a financial asset sells for more than its purchase price, the difference between the two is considered a capital gain.
The ATO considers gifting property as disposal for tax purposes, meaning CGT will apply.
When you give property as a gift, the ATO will assess any capital gains tax liability using the property’s market value on the transfer day. This means if the property has increased in value since you purchased it, you may be liable for CGT on the difference.
There are, however, several exemptions and concessions that may apply, so it’s vital to get professional advice from a tax accountant before gifting any property. For example, if the property is your main residence, you may be eligible for the main residence exemption, which will exempt you from any CGT liability.
There are also a number of other circumstances in which you may be eligible for a partial exemption or concession, so it’s worth getting expert advice to ensure you know exactly where you stand.
Gifting Shares and Cryptocurrency
When it comes to gifting shares or cryptocurrency, it’s important to remember that the same rules apply as with property gifts. In other words, a CGT event occurs when you dispose of the shares or cryptocurrency, and you’ll be liable to pay capital gains tax.
For example, if you bought shares or cryptocurrency for $820 and later gifted them when their market value was $2,320, you’ll trigger a CGT bill for the $1,500 difference.
Remember: For shares, cryptocurrency, and property, the receiver doesn’t incur CGT liability when they receive the gift. Should they decide to dispose of that gift themselves and incur gain from said disposal, they will also incur CGT.
4. There is a Tax Limit If You Receive Age Pension or Centrelink Benefits
If you receive Centrelink, Age Pension or other social security benefit in Australia, there are limitations on how much you can give away without affecting your benefit payments. For example, you can give up to $10,000 per financial year or $30,000 over a 5-year period without affecting your pension payments.
If you go over these limits on your pension payments, you may risk having your benefits reduced.
These limits are designed to ensure people who receive government benefits do not use them to create wealth for themselves or their family members. So, if you’re considering making a large gift, it is important to check the gifting rules before doing so. Otherwise, you may find yourself inadvertently reducing your own income.
5. The Same “Gift Tax” Rules Apply to Inherited Property
When property owners die, their asset portfolio is distributed to their beneficiaries. But what does that mean for taxes? Are beneficiaries required to pay tax on inherited property in Australia?
As with gifting property (or shares), the answer is no. CGT is only payable on sold assets—so if you inherit a property and then decide to sell it, you will be required to pay CGT on any gains made from the sale. If you keep the property and do not sell it, you will not be required to pay CGT.
There are also quite a few CGT exemptions that will apply to the sale of inherited property. Whether or not these exemptions apply will generally depend on:
- When the deceased person first purchased the property,
- Whether or not the property was the deceased’s main residence or their investment property,
- When they died, and
- If they were an Australian citizen at the time of their death.
For example, if the person you inherited the property from (i.e., the deceased person) bought the property before their main residence & prior to 20 September 1985, and you inherited it after that date, you won’t have to pay CGT on the sale of the inherited property if you sell it within two years of inheriting it.
There are also some partial exemptions available, but this is quite a complex area of the tax law, so you might want to seek professional advice regarding inheritance tax and how it applies to your specific circumstances.
Gifting can be a great way to show your loved ones how much you care, but it’s important to be aware of the potential tax implications before going ahead. If you have any questions about whether or not your gift will be subject to taxation, be sure to speak to a qualified professional before proceeding.
When it comes to gift and inheritance taxes, KNS Accountants can help you navigate the complex rules and regulations. We can help you understand your obligations and ensure that you comply with the law. We can also help you minimise your tax liability by identifying opportunities for tax planning.
Our comprehensive services can help you make the most of your gifts and inheritances while ensuring that you are meeting your tax obligations.
Contact us today to learn more about how we can help you with your gift and inheritance tax planning through an income test, assets test and more.