Thank you for your question Maggie, and I must say you have one awesome friend there!
There are a few things to consider with regards to the situation that you have outlined here, and I will aim to provide a response to each area for you.
Firstly, capital gains tax (CGT). For most CGT events (in the case of property this generally occurs when you enter into the contract – that is the date on the contract to sell, not when you settle on the property), the capital gain will be the difference between the amount you sell the asset for (capital proceeds) and what you originally paid for the asset (cost base) – that is, where you receive more money for an asset than what it cost you.
According to the ATO, the cost base of a CGT asset is usually what you paid for it, together with some other costs that may have been associated with purchasing, holding, and disposing of the asset. If the rental property was acquired by your friend before 1985, then no CGT is payable, however, if there were major improvements done to the property since that time, then they may be subject to CGT. If the rental property were acquired after 1985, then obviously CGT would apply.
Remember, your friend will only need to pay CGT in the financial year that she sells or disposes of the rental property. But as CGT can be a little tricky to calculate, and as we do not know all the circumstances around the investment property, it would be worthwhile your friend seeking specialist tax advice at that time.
Secondly, you are correct – the money that you and your brother receive from your friend as a gift is not assessable income for you and therefore is not required to be reported in your tax return. It is however what you do with this money afterwards, that can have tax consequences. Should you invest that money and generate a return or put it into a bank account and earn interest, then those amounts will need to be declared in your tax return and will be subject to tax.
With regards to gifting, there are specific rules that need to be considered prior to undertaking such an activity. Whilst the gifting rules do not prevent someone from making a gift to another person, there is a cap on the amount that can be gifted.
There are two gifting rules that apply:
1. A person can dispose of assets up to $10,000 in one financial year, or
2. An additional disposal limit of $30,000 over five financial years, which cannot include more than $10,000 in a single financial year.
Should a person go over the amounts noted above, then for five years after that person gave away an asset over the allowable amount, Services Australia (Centrelink) will count the excess amount in the assets test and apply deeming (a set of rules used to work out income created from the asset) and include it in your income test, which may have an impact on the amount of pension that one receives.
Should your friend though plan to retire in 10 years’ time when she is 65 years of age, and say at that time consider the age pension, then by gifting an amount to you and your brother now, or more than 5 years out from when she is likely to apply for age pension, this should not adversely affect her ability to obtain a pension based on the gift parameters noted.