Are There De Facto Tax Benefits Australia?
The short answer is yes; however, these advantages are not automatically conferred and require a nuanced understanding of relevant legislation.
Understanding how a de facto relationship impacts your tax situation can open doors to various financial benefits.
Key Takeaway: Yes, there are tax benefits for de facto couples in Australia, but you must understand the rules to take full advantage of them.
Income Splitting: A Win-Win
Income splitting can be a handy strategy for couples.
By transferring income-generating assets to a partner with a lower income, you can reduce your overall tax liability.
However, it would help if you ensured that the asset transfer aligns with the laws to avoid falling into the “deemed dividend” trap.
Key Takeaway: Income splitting allows you to legally redistribute income within the couple to reduce overall tax liability.
Medicare Levy Surcharge
Your combined family income, not just your individual income, will determine whether or not you have to pay the Medicare Levy Surcharge.
The surcharge kicks in if your household income exceeds a particular threshold, currently $180,000 for families.
This incentivises you to look into private health coverage to avoid the surcharge.
Key Takeaway: Consider private health insurance to avoid the Medicare Levy Surcharge, which is calculated based on your combined family income.
Spousal Tax Offset
Highlighted by the ATO, there’s a potential tax offset when supporting a partner who earns less than a certain amount.
Although the spousal tax offset is less common these days due to dual-income households, it’s still a feature worth noting.
Key Takeaway: The spousal tax offset can help you lower your tax liability if you’re supporting a partner who earns less.
Capital Gains Tax (CGT) Implications
Another financial benefit of being in a de facto relationship concerns capital gains tax.
If you transfer an asset like property, to your partner, you may be exempt from CGT if your partner uses the asset as their primary residence.
But tread carefully; this isn’t a one-size-fits-all strategy and might not apply to all assets or situations.
Key Takeaway: Asset transfers like property could be exempt from Capital Gains Tax, but conditions apply.
First Home Super Saver (FHSS) Scheme
If you and your partner want to buy your first home, the FHSS Scheme can be a helpful tool.
Each of you can contribute up to $30,000 to your super and later withdraw it for a first home deposit while enjoying the tax benefits of super contributions.
Key Takeaway: The First Home Super Saver Scheme allows you to use your superannuation to help purchase your first home, complete with tax perks.
Important Tips and Considerations
- Documentation: Keep all financial documents, like bank statements, which can provide evidence of a de facto relationship.
- Legal Advice: Legal advice is highly recommended for complex matters like asset splitting or estate planning.
- Consult the ATO: When in doubt, the ATO’s official guidelines should be your go-to resource.
Key Takeaway: Proper documentation and professional advice are essential for navigating the complexities of tax benefits in de facto relationships.
Providing Assistance To Our Clients
We recently had the opportunity to assist a client who is currently expecting a child, is in a de facto relationship with the father, and was understandably curious about how this would impact their taxation situation.
Our firm reviewed the Australian tax laws to provide her with comprehensive advice. We explained that the combined income of de facto partners is assessed for the Medicare Levy Surcharge, influencing whether they’d need to pay extra on top of the standard 2% Medicare Levy.
We also introduced the concept of income splitting, an advantageous strategy to redistribute income-generating assets and potentially lower the couple’s overall tax liability.
Additionally, we touched on the Spousal Tax Offset, which could be beneficial if one partner earns significantly less. Finally, we assisted her in understanding how parental leave pay would be taxed.
Consult with Professionals
Being in a de facto relationship in Australia comes with a series of tax implications and benefits.
Whether it’s income splitting, capital gains tax, or even first home buying, there are various ways to optimise your financial situation.
Always remember, the devil is in the details when it comes to taxes.
So, consult with professionals and follow ATO guidelines to get the most out of your de facto relationship.
Key Takeaway: Understanding the tax implications and opportunities in a de facto relationship can yield substantial financial benefits. Knowledge and professional advice are your best assets.
Director of Melbourne Family Lawyers, Hayder manages the practice and oversees the running of all of the files in the practice. Hayder has an astute eye for case strategy and running particularly complex matters in the family law system.