Tax and marriage: Tips on nuptial know-how
Every couple’s “big day” will of course be marked more by flying champagne corks and numerous speeches of questionable quality, instead of the tax implications that go along with swapping rings.
Having a general understanding of what it means to be a “spouse” under tax law can change the approach taken to certain financial arrangements, clarify potential pitfalls and allow clearer planning.
Meaning of “spouse” under tax law
Broadly speaking, the tax law defines a “spouse” as:
- another individual, of any sex, who is in a relationship registered under state or territory law (that is, married), or
- if not registered, lives with another on a genuine domestic basis as a couple (a de facto relationship).
Some general tax implications from being a tax law “spouse” are as follows:
Post-nuptial tax return
When tax time comes around, each partner in a couple still needs to lodge their own individual tax return.
There is no “family” tax return that can be used in Australia, unlike some foreign tax jurisdictions. However each will be required to disclose, in certain parts of these tax returns, some specific details of their other half.
Apart from a possible name change and a change of address for one or both in the couple, the Tax Office will need to know the period during the income year that each became a spouse.
It will also require, for example, information on taxable income for a spouse, such as foreign income, distributions from a trust, reportable fringe benefits and also if any government pensions or allowances have been received.
The details provided are used to work out certain government entitlements that may be based on overall “family income” thresholds (see below), as well as possible eligibility to other rebates and offsets. It is therefore critical that such information is completed in each spouse’s tax return accurately to ensure that the correct entitlement and offsets are claimed.
Personal assets taken into marriage
Getting married does not change the ownership of personal asset holdings held by an individual.
For example, listed shares that were 100% owned by a partner prior to marriage will continue to be held in that capacity (unless the individual decides to transfer their interests). Any capital gain or loss arising from the disposal of the shares will therefore be included in the assessable income of the legal owner (regardless of marital status).
The same applies to the assessment of franked dividends and entitlements to imputation credits – again, this will be assessed fully in the hands of the owner.
Joint bank account
Generally, the Tax Office assumes a 50/50 split of interest income where spouses open a joint bank account together. In most cases, spouses would have a joint and equal entitlement to the interest income from their joint account.
The Tax Office has indicated however that interest income can be assigned to one partner in favour of the other in respect of a joint bank account in certain scenarios. This will depend on whether there is evidence to show that one spouse is “beneficially entitled” to that interest.
For example, evidence will be required if one partner initially contributed a greater proportion (in dollar terms) to the joint bank account than the other partner and there is a desire to have the interest derived assessed in the hands of the primary contributor rather than jointly (that is, 50/50).
According to the Tax Office, relevant evidence to demonstrate whether a spouse has beneficial entitlement to the interest include such things as who contributed to the account, and in what proportions, the nature of the contributions (is the money held on trust for a dependant, for example), and if one partner accessed the funds and any accrued interest for their own purposes.
Main residence exemption for the family home
1) How does the main residence exemption work?
The ownership of a family home is something that most newly weds aspire to and work towards.
The family home is generally exempt from CGT under the main residence exemption.
A capital gain or loss arising from the changing value of a house would be disregarded if the dwelling is subsequently disposed. A full exemption is available where the dwelling is treated as a “main residence” throughout the period that it is owned.
As far as defining that term “main residence”, there are no specific rules as to when a dwelling is deemed to be a main residence. This is subject to the relevant facts and is considered on a case-by-case basis. The Tax Office outlines some factors to consider which may include, but are not limited to, the length of time the dwelling is occupied, the address to which mail is delivered, connection of utilities and where one’s family resides.
2) Spouses with different main residences
It is not unusual for one or both partners to come into the marriage already owning a property in their own names.
A common scenario would be where one spouse moves into the other spouse’s home and leases their former residence following their nuptials.
Special CGT rules apply in relation to the main residence where each partner comes to the marriage each owning a main residence.
In simple terms, for the period where this occurs the special rule requires each spouse to choose one of the following options:
- Option A: Choose only one of the dwellings to be their main residence, or
- Option B: Nominate the different dwellings as their respective main residences.
Further, if option B is chosen, the extent of the exemption for the period will depend on the ownership interest that individual has in the dwelling.
- Individuals who hold more than a 50% interest in the dwelling are allowed an exemption for half of the period.
- Where the interest is equal to or less than 50%, the exemption fully applies for the period.
The main residence CGT exemption may therefore be split between dwellings depending on the option chosen by each spouse.
Note that the special rules for spouses do not apply if they are living permanently apart from each other. An example may be where one partner takes up an employment contract in another city for a year and they buy another dwelling in that city, with the other partner staying in the original house. After the contract ends, the new dwelling is sold. The main residence exemption would typically apply on the sale of this dwelling.
The application of the main residence exemption can be complex where it involves spouses each having a different main residence. Consult this office if you if need assistance.
Where “family” income determines a tax offset
Certain entitlements and offsets may be affected once a couple marries – a common offset being the private health insurance rebate.
The private health insurance rebate is a measure that encourages Australians to take up private health insurance by offering a reduction in premiums. This can be an “upfront” benefit by way of reduced premiums or can be claimed as an offset upon lodgement of the individual’s tax return.
The rebate offered on premiums is income-tested and determined by specific income “tiers”. The maximum rebate is 30% and phases out depending on the individual’s income (consult this office for the exact definition of what constitutes “income”).
In the case of individuals who move from “single” status to living as spouses (deemed “family” for this rebate), the level of rebate on insurance premiums in relation to an individual can change if a person had a spouse at year-end. Family income tiers would apply instead of single income tiers.
For example, say the prospective wife, while still single, is on a good annual salary of $140,000. Assuming no other income for the purposes of the rebate, the income level will place her in the “tier 3” threshold, which puts her in an income range that means no rebate is available (that is, 0%).
The prospective husband however earns $90,000 a year, which while single, entitles him to a 19.36% (from April 1, 2014) rebate on his private health insurance premiums under “tier 1”.
If they marry prior to June 30, 2014, their combined income of $250,000 as a “family” means that the rebate available to each of them is set to “tier 2”, or 9.68% of insurance premiums.
The consequences for each spouse will be different. Mr Taxpayer’s rebate will be reduced by about 10%, which means if he has claimed the rebate entitlement upfront through his policy, he will be required to incur a private health insurance debt in his 2014 tax return. This will be shown in the notice of assessment as an “excess private health reduction”. Mrs Taxpayer on the other hand will enjoy a rebate that was denied to her before due to her previous income level, with the approximate 10% rebate on her premium refunded as an offset that will be shown on her notice of assessment.
Certain other tax offsets are also income-tested as a family unit, such as the Net Medical Expenses Offset, however this is being phased out.
Superannuation spouse contributions
A tax offset is available for superannuation contributions made on behalf of one spouse to the other spouse’s super fund, should for example the couple decide to have children and one partner leaves paid employment to do so. The offset applies to contributions made on behalf of a non-working or low income-earning spouse (with assessable income of less than $13,800, which includes reportable fringe benefits and reportable employer super contributions).
The offset claimant may be entitled to claim 18% on super contributions up to $3,000, but with a maximum offset available of $540. Note that a spouse contribution would constitute a non-concessional contribution and will count towards the contributing partner’s non-concessional cap (which is $150,000 for 2013-14 and $180,000 for 2014-15).
May their problems be little ones
Down the track, there is always the prospect of the happy household being home to one or more budding taxpayers-to-be.
It is worth noting that the Baby Bonus no longer applies from March 1, 2014. Nonetheless, there is the incumbent Paid Parental Leave scheme to consider, and the proposed and more generous paid parental leave plan from the current government to keep an eye on.
There may be capacity however to receive the new Newborn Upfront Payment and Newborn Supplement as part of Family Tax Benefit part A (if eligible, and if certain conditions are met). Ask this office for more details.