It doesn’t matter whether you are for or against the joint finances debate, once you sign a rental lease or a purchase contract with a partner you become a de-facto couple by law and when it comes to tax. What does this mean? Well apart from sounding like an antacid tablet, for tax concerns, de-facto status means you must declare your partner on your tax return. This can seem a little confusing, so we’ve created this simple guide to get you up to speed.
A de-facto tax guide for the newly initiated
How does a de-facto relationship affect my tax obligations?
Aside from adjusting to the living habits of your partner, which is sometimes tricky in itself, you also need to adjust how you do your tax return. You still lodge a personal tax return each year but from here on, you include your partner’s income on it as well. Plus a few other details about their finances.
As a de-facto couple, your income is now assessed jointly and referred to as ‘family income’.
The ATO use your joint income to calculate family tested:
- Tax offsets you may be entitled to
- Medicare levy or Medicare Levy Surcharge
- Private health cover rebate
What details do I need to provide about my partner?
For a start, as well as your own income, you’ll need to include all the income your partner received over the year.
This includes your partner’s:
- Taxable Income
- Trust distributions
- Reportable Fringe benefits
- Pensions and Allowances
- Reportable Super contributions
- Some other exempt income payments
- Foreign Income
- Child support payments paid
- Net investment losses
The ATO also requires other details about your partner, such as:
- Whether their refund can be used to reduce any Family Assistance debt
De-facto tax changes aren’t necessarily bad
The most common change with de-facto tax status is if you don’t have private health cover and your ‘family income’ rises above the Medicare Levy Surcharge threshold ($180,000 plus $1,500 per child after the first child). At this point, you may need to pay the surcharge on top of the Medicare Levy.
If this is the case, it may be a good idea to consider purchasing a private health cover policy. At least then you’ll benefit from that money instead of paying it to the ATO.
On the other hand, some people find that their joint income doesn’t take them above the $180,000 threshold. In which case, neither of you will have to pay the Medicare Levy Surcharge, even if one of one of you had to beforehand. This means your tax refund may go up.
If you have private hospital cover and your family income is less than $280,000, you may be eligible for a private health insurance rebate. Any rebate you are entitled to can either be claimed as a discount on your premiums or claimed on your tax return.
What happens if you both own property?
It’s quite common for both partners to own a property prior to meeting the other. In this case you may need to factor Capital Gains Tax into consideration.
Capital gain is the difference between the purchase price and the net selling price of an asset. In this case, property. Capital Gains Tax (CGT) is a levy generally paid on the increase in the value of the property between the purchase date and the date it sold. You do not need to pay CGT until you dispose of a property.
A de-facto couple can only have one main residence exempt from CGT at any one time. If both of you own a property, you will need to decide which of the properties you want the exemption to apply to OR calculate apportionment of CGT between the two properties.
When or if you choose to sell the property you opted not to have as your main residence, you need to pay CGT – often this is on the difference in value from the date you moved in with your partner and the date you sold the property.
As long as both properties meet the exemption requirements for a main residence, you do not need to pay CGT on either property for the period you owned them prior to becoming a de-facto couple.
CGT exemption requirements:
- The property was your home for the whole period you owned it.
- It was not used to produce an income – inc. home business, rental property.
- Is on less than two hectares of land.
Get your de-facto tax obligations in check
Moving in with a partner for the first time takes some adjustment. There are always compromises to make and odd habits you had no idea your partner had that always take some getting used to. But isn’t that all part of the fun of taking that next step? It’s a great place to reach in your relationship, so congratulations!
Our advice is to talk about finances openly so you are both on the same page from the start. Include your de-facto tax obligations so you can get on with enjoying your new life together, without worrying about it. Talk to a tax agent like Etax Local if you need to clarify anything about your new tax status. Likewise if you have questions about including your partner’s finances at tax time.