Home Lifestyle When is a loan a gift? – Basics of retirement

When is a loan a gift? – Basics of retirement


And why does Centrelink care?

A few weeks ago we talked about how the donation rules worked for Mary, Jeffrey and Hannah. We received a lot of questions from members who were completely embarrassed as to whether they borrowed or donated money to family and friends. And some have wondered why this is Centrelink business at all.

Today we will look at the difference between a loan and a gift in terms of Centrelink.

It is important to understand that there is a difference, and your entitlement to an old-age pension may vary depending on whether you decide to give or borrow money.

Let’s start with how this affected Sam.

And then we can go through the rules, which meant he was able to maximize his income once we explained his options.

Why Sam gave up early

Sam has just turned 61 and will be entitled to an old-age pension when he turns 67. Sometime in the future he wants to lend his son $ 100,000 to help him with home renovations. He may call it a loan, but doesn’t expect his son to repay the money.

When he learns about the “five-year rule” that applies to donations for old-age pensions, he realizes that it is wiser to donate that money now.

How will it work?

The full $ 100,000 will be linked to Sam’s “gift story” for five years, despite the fact that he has not yet applied for an old-age pension.

He gives the full amount to his son, and Centrelink estimates that this amount is reduced by $ 10,000 per year annually as a gift to a maximum of $ 30,000 for five years, as shown below:

Year 1 – Sam 62 A $ 90,000 gift applies
Year 2 – Sam is 63 years old A gift of $ 80,000 is applied
3 years – Sam 64 A $ 70,000 gift is applied
4 years – Sam 65 A $ 70,000 gift is applied
5 years – Sam 66 A $ 70,000 gift is applied
6 years old – Sam is 67 years old and he is applying for an old-age pension No gift applies. Sam’s “slate” is erased in 5 years, and the gift will not affect his retirement age

Because Sam donated the money more than five years before he was old enough to apply for an old-age pension, he will not be affected by the pardon regulations.

If Sam had waited until he applied for an old-age pension to donate money, he would have been affected each year by a smaller old-age pension, which includes:

  • $ 7,020 or $ 270 for two weeks in the first year,
  • $ 6,240 or $ 240 for two weeks in the second year
  • and then $ 5,460 or $ 210 for two weeks over the next 3 years.

That’s a total of $ 29,640 less pension for the first 5 years just because he expected rather than gave early

Loan and gift rules


In essence, Centrelink requires some evidence to identify your loan as a loan. This includes either a formal contract, or an email exchange specifying terms such as the amount and repayment schedule, the duration of the loan and any interest to be paid. You must also provide evidence of your current loan balance when you apply for an old-age pension. Because loans are financial assets, profits are calculated from the current balance sheet, and it is your responsibility to update Centrelink as your balance decreases. If no payments are made or you do not update Centrelink, the entire balance is considered in accordance with the asset rules on an ongoing basis.


On the other hand, if you donate money, you don’t expect it to come back. You can donate up to $ 10,000 per year to a maximum of $ 30,000 for 5 years.

Here are the rules regarding these limits.

The restrictions are the same for singles and couples. The most that you can donate without affecting your old-age pension is:

  • $ 10,000 for 1 fiscal year, or
  • $ 30,000 for 5 financial years – this cannot include more than $ 10,000 for any year

The amounts you donate exceed these limits:

  • count in the asset test, plus
  • considered that interest is applicable and this will be included in your income test within 5 years after the date of the gift.

If you change the status of the loan – say, you borrow money and then forgive the payment, then it becomes a gift, and the rules of donation apply from the moment of forgiveness.

So do you borrow or give money to children? Who would have thought that there is something to think about.

You can read more about gifts here and, as always, you can check out their rights below.

Check your rights


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