PART I
YOU AND YOUR FAMILY

From marriage and children right through to divorce, retirement and ultimately death, all families encounter many life-changing events. And in nearly all of these events, there are tax consequences along the way.

The Australian tax system offers a range of tax benefits including credits, refunds, offsets and bonuses to support families. Some people feel ambivalent about putting their hand out for government entitlements. But don't be shy in claiming your fair share. After all, the government doesn't get shy when it comes to taxing you!

TAX FACT

Tax evasion and tax avoidance are illegal ways of reducing your tax payable. Tax planning and tax minimisation are legal ways of reducing your tax payable.

Part I looks at the tax concessions available to families, the special considerations you need to look out for, as well as some simple strategies to save tax within your family.

TIP

You need a tax file number (TFN) to be eligible for any of these tax concessions, as do your spouse and your children if they have income, superannuation or investments.

1 MARRIAGE

Accountants are frequently asked two questions by couples who are just about to get married: ‘Are there any tax implications once we tie the knot?’ and ‘Do we need to start doing joint tax returns?’

Your wedding day is a special day. So I'm perplexed as to why on earth the bride and groom are thinking about the ATO during such an exciting time in their lives!

You don't need to worry about tax in the lead-up to your nuptials. Unless you are involved in a business together, you don't have to lodge a combined tax return. Any share of joint investments, such as interest, dividends and rental properties, is still recorded separately in your respective tax returns.

TIP

You don't have to lodge a combined tax return if you're married. Any joint income is recorded separately in your respective tax returns.

You do need to show on your return that you now have a spouse, and disclose his or her taxable income each year.

PITFALL

The combined income of married couples is taken into account if you don't have private health insurance (an extra 1 per cent Medicare levy is charged if you earn over $180 000 combined, increasing to 1.5 per cent for couples earning more than $280 000) as well as when calculating Family Assistance Office benefits such as child care rebates and family tax benefits.

If you elect to change your name, you can notify the tax office:

• by phone on 13 28 61
• by post after completing the Change of details of individuals form (NAT 2817)
• or online via your myGov account at www.my.gov.au. Make sure it is linked to the ATO.

You will need either your Australian full birth certificate; your Australian marriage certificate; or your Australian change of name certificate.

According to the ATO, the definition of spouse has been extended so that both de facto relationships and registered relationships are now recognised. Your ‘spouse’ is another person (whether of the same sex or opposite sex) who:

• is in a relationship with you and is registered under a prescribed state or territory law
• although not legally married to you, lives with you on a genuine domestic basis in a relationship as a couple.

TAX FACT

Since 1 July 2009, people living in same-sex relationships have been treated in the same way as heterosexual couples for tax purposes. The ATO has outlined some of the tax concessions now open to same-sex couples, including:

• Medicare levy reduction or exemption
• Medicare levy surcharge
• dependant (invalid and carer) tax offset
• senior and pensioner tax offset
• spouse super contributions tax offset
• main residence exemption for capital gains tax.

It is not unusual to find a couple where each owns a main residence that was acquired before they met. However, spouses are only entitled to one main residence exemption for capital gains tax (CGT) purposes between them. If both members of a couple own a main residence they must do either of the following:

• select one residence for the exemption
• apportion the CGT exemption between the two residences.

Provided the homes meet the requirements for the main residence exemption, they will both be wholly exempt from CGT for the period prior to the couple being treated as spouses. However, from the time the couple became spouses, only one exemption is available, though this may be divided between the two dwellings.

EXAMPLE

Mary bought a house in 1992. She lived in it right up to the day she married Matthew in 2006 and moved into his house, which he had purchased in 2000. As they elected to treat Matthew's house as their main residence, Mary will be subject to CGT on her house from 2006. She will not be liable for CGT on any capital growth in the 14 years prior to becoming Matthew's spouse.

2 INCOME SPLITTING

Income splitting is a legitimate tax-planning tool and one of the easiest strategies to implement. There are a few simple strategies for you to follow and they all mainly revolve around the marginal tax rates for yourself and your spouse, both now and in the future. The tax rates for individuals, not including the Medicare and other levies, are shown in table 1.1.

The goal is to try to level the income of couples so that they are paying tax at the same marginal rate. While income from personal exertion (such as your salary) cannot be transferred to the other partner, there is scope to have passive income from investments transferred if the assets are held in the lower-earning spouse's name.

TABLE 1.1: tax rates for individuals excluding levies (2022–23)

Source: © Australian Taxation Office for the Commonwealth of Australia.

It amazes me how many smart business people are really dumb when it comes to reducing tax. Too often I see rich business people paying the highest tax rate (47 per cent including medicare levy) on interest or dividend income while their spouses don't fully use their $18 200 tax-free threshold. With the $1.7 million transfer balance cap on superannuation, there is an opportunity to split superannuation contributions between spouses such that each spouse maximises their respective $1.7 million thresholds before they retire.

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Ensure that all investments are in the name of the lower-earning spouse so that they can take advantage of the lower tax rates (particularly the first $18 200, which is tax-free) on any investment income derived. Likewise, have all passive deductions, such as charitable donations, in the higher-earning spouse's name as they may get a return of up to 47 per cent, depending on their income level.

The best tax outcome can be achieved with a low-income earner holding investment assets. They could earn up to $25 437 tax-free (see p. 15), receive a refund of all imputation credits and pay less tax on capital gains.

EXAMPLE

If an investor on the top marginal tax rate of 47 per cent had a $100 000 capital gain on an asset held more than 12 months he/she would pay $23 500 in tax and Medicare levy. If an investor with no other income had a $100 000 capital gain he/she would pay $5967 — a saving of $17 533.

PITFALL

Any tax benefit derived by transferring an income-producing asset from one spouse to another may be lost if there is CGT to pay on assets originally acquired after 19 September 1985.

If you transfer an income-producing asset to your spouse you may need to find out the market value of the asset from a professional valuer. This is regardless of what you actually receive because the transaction is not independent nor is it at arm's length. In this situation either party could exercise influence or control over the other in connection with the transaction.

TIP

If you do not have a spouse, or you are both in the highest tax brackets, consider creating an investment company that is taxed at a flat rate of 30 per cent (reducing to 25 per cent if your company derives at least 20 per cent of its income from non-passive sources and has an annual turnover below the small company threshold of $50 million) for all income.

3 DEPENDANT (INVALID AND CARER) TAX OFFSET

The dependant (invalid and carer) tax offset (DICTO) is only available to taxpayers who maintain a dependant who is genuinely unable to work due to carer obligation or...