Tax tips to avoid handing over more cash to the ATO

Being able to pass on your wealth to loved ones can be an important motivator for success. Now, as Australia battles a housing crisis, more people are considering passing on an inheritance earlier.

This can be to give them a leg up, or because you want to be around to see them enjoy the fruits of your labour. But, gifting assets to your children or grandchildren can come with unexpected tax consequences.

The most commonly gifted assets are cash, cars, shares or property, like land or buildings.

If you are simply giving cash, there are no tax implications for either the giver or the receiver of the gift. However, for other types of assets, Capital Gains Tax (CGT) may need to be considered. That’s not an issue for cars (which are exempted from CGT) but is likely to be an issue for gifts of both shares and property.

Tax implications are something to consider if you are passing on a gift like cash or property to loved ones. (Source: Getty) (Source: Getty)

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So, if you decide to give shares or property, the giver will be subject to CGT on the disposal – and if gifting to children (or other family members), the asset will be deemed to have been disposed of at its market value, which could trigger a hefty CGT bill.

There are no immediate tax consequences for the receiver of the gift – they would be deemed to have acquired the gift at (typically) market value and would then be subject to CGT when they ultimately sell the asset.

TIP: If gifting shares or property, make sure you know what the market value of the asset actually is on the date of gift. That’s not difficult for shares listed on the stock exchange – you can simply look up the value of the shares that day online – but for private company shares or real estate, you may need a professional valuer to give you a written valuation.

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Note also that any income (such as interest or dividends) the recipient earns on the gifted money or asset (e.g. such as interest on a cash gift deposited into a bank or dividends on gifted shares) will be assessable income to them – this would be included in the recipient's tax return and taxed at their marginal tax rate.

How can I get a tax concession?

If you decide to pass on the home you are actually living in (perhaps spurred by a tree-change or a desire to downsize), you may able to use the main residence exemption to reduce or eliminate your CGT bill.

If you pass on shares in a private company (perhaps your own company, spurred on by your impending retirement), there are a number of CGT concessions that could substantially reduce or completely eliminate any CGT bill. Beware that these small business CGT concessions come with many conditions that must be met, so be sure to take professional advice before taking any action.

How should I handle a will if I've been given a terminal diagnosis?

There is nothing positive about learning that you don’t have long to live but it can at least be an opportunity to make sure your family is properly provided for.

Most people use their Will to determine how their assets will be distributed after death but it can be worthwhile transferring some assets before death.

For instance, if you’ve previously sold some assets at a loss and have capital losses available, you could gift CGT assets to your children now and use the capital losses to shelter the capital gains.

So, you get to transfer the assets tax-free and the recipients will also benefit because they’ll acquire the assets at a higher CGT cost base, meaning lower CGT bills for them when they ultimately sell the assets (they will acquire the assets for market value as a result of a lifetime transfer, rather than at your original purchase cost as a result of inheriting on death)

Also by Mark Chapman:

• Uber, Airbnb, Airtaskter: The tax rules for side hustles you need to know

• Tax tricks to boost your return and retirement fund

• When to pay the ATO: How social media complicates tax

Is money I win tax-free?

Generally, a gift or prize is regarded as a personal windfall gain and not as taxable income. In particular, prizes are not taxable if:

• the prize is not linked to your occupation

• it was made voluntarily by the prize giver

• the prize was not solicited

• it cannot be traced to any services which you gave

• the motive of the prize giver was altruistic ; and

• you do not rely on the prize money for general living expenses.

All of this means that you don't need to declare prizes won in ordinary lotteries such as lotto draws and raffles.

If you win prizes as a game show contestant, you only declare those prizes if you receive regular appearance fees.

But not all winnings are tax-free. If your bank or building society (or any other financial institution) runs a prize draw or lottery, the prizes will be taxable income. This can include cash, low-interest or interest-free loans, holidays or cars.

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