Without family assistance, younger Australians in many locations are struggling to achieve home ownership. This wouldn't be the problem it is if house prices were stable or even falling. But with prices rising faster than inflation, the task of building up a deposit out of after-tax savings is made more difficult.
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Parents are naturally concerned about their children's plight and if they have spare cash available they'll often help with a house purchase in various ways. These include outright gifts or informal loans to help obtain the deposit, guarantees of the loan being taken out by the children, direct acquisition of part of the property and allowing this equity to be included in the loan collateral and even negatively gearing a house purchase to be rented to the children.
With such a wide range of options available, the key question is which is the best way to help. The answer very much depends on the financial situation of the parents and their willingness to accept the risks involved.
Outright gifts are legal because Australia doesn't levy death or gift taxes but depending on the amount involved, the money can still be included in assets assessed for the age pension for up to five years from the date of the gift. The doubling of the assets test taper rate from January 1 has increased the attractions of giving money to children five years before reaching age pension age or at a later date if the resulting age pension benefit after five years is substantial.
The major complication of outright gifts is the potential loss of money in the event of the children's marriage break-up. This is why some parents opt for interest-free loans or direct involvement in the purchase of the property. Parents with large tax bills can use their cash flow and borrowing capacity to negatively gear a property rented to their children.
This is permitted under Tax Office rulings, which unlike those for self-managed super funds permit related negative gearing arrangements as long as arms-length market rents are charged. The drawback with negative gearing assistance is that capital gains tax liabilities accrue and are payable at the time of sale. However, payment of the liability can be postponed indefinitely if the property is bequeathed to the children and not sold.
By far the riskiest way to assist children is by guaranteeing their loan commitment. In the event of unemployment, illness or marriage breakdown, there's a high probability that the financial institution will call upon the guarantor to meet the outstanding debt.
A forced sale in such a situation often increases the losses involved even when overall property markets are strong. Providing guarantees only has merit if the guarantor has the financial capacity and desire to take full ownership of the property.
Daryl Dixon is executive chairman of Dixon Advisory. comments@dixon.com.au
