Discussing tax planning and finances are not usually what most people consider to be a romantic gesture of one’s love for another. However, when you feel yourself heading into a serious relationship, it’s important that you consider the practical tax and financial implications associated with your new found commitment. Whether you are thinking of moving in together and entering into a de facto relationship or getting hitched, failing to consider such issues could cost you down the track, especially if you have already accumulated a reasonable amount of wealth prior to entering into the relationship.
The following issues should be taken into consideration before taking the plunge:
The last thing on one’s mind when entering into a relationship is the possibility of not living happily-ever-after, however if you own material assets when you enter into the relationship, then these assets can become ‘divisible property’ should your fairytale come to an end.
In order to protect these assets, you should seek advice from a family lawyer that will be able to outline a set of steps that could potentially be taken to reduce the likelihood of you losing some of these assets if the relationship turns sour. An example of this may be to enter into a Binding Financial Agreement or prenuptial agreement which will inevitably result in some delicate and perhaps awkward discussions with your other half.
However it should be noted that there is no absolute guarantee that a protection strategy will work. The Family Court has very wide powers, which include overlooking legal structures and setting aside previous agreements made by the parties.
For instance, if you transfer an asset into a discretionary trust before your partner moves in or becomes your spouse, the Family Court may still include the asset in the divisible property pool if your relationship breaks down. All in all, asset protection is all about putting up ‘hurdles’ to make the acquisition of goods harder should the relationship end.
One of these hurdles could be for you to surrender your interest in the asset. This could mean that you gift your investment property to your parents or siblings or transfer the property to a discretionary trust over which you have no control. This means that while disowning your interest in an asset protects you from future spousal claims, you are indefinitely giving away your control over the assets; therefore your beneficiary can do as they please with the asset without consulting you.
You’ll also need to consider the taxation and stamp duty implications on the asset transfer when deliberating this move. While you may not receive any consideration for the gifting of the property, the capital gains tax provisions include a market value substitution rule that treats as if you have received market value consideration for the property, which may give rise to capital gains tax in your hands. Accordingly, it is critical that you fully understand the impact of your strategy before it is implemented. The same may apply to stamp duty.
If you own a property, which is you principle place of residence prior to entering into the relationship and you chose to transfer half of the asset to your other half, there may be an exemption from stamp duty in relation to the transfer. But you should seek adviser from a professional as the stamp duty laws vary between states. Additionally, the disposal will not give rise to any capital gains tax as the property is your main residence.
However, if you enter into the relationship with each partner owning properties respectively, then you have the following choices:
• You may pick one of the properties as the main residence for both of you during the period you are together; or
• You may nominate a different property each as your main residence, but the main residence exemption will only apply to half of the period while you are together.
To determine which option will provide you with the best tax outcome, you may need to sit down and look over the numbers with a professional and consider the future value of each property.
As you relationship progresses, you may need to review your existing taxation and financial arrangements to see if incorporating your partner into these arrangements will result in a better outcome. This includes a discretionary trust that you may set up or wish to set up and include your partner as a beneficiary. If your partner is in a lower-tax bracket than you, then you may want your trust to distribute income to them to utilize their lower marginal tax rate.
However, if you have already established a trust prior to your relationship then you may need to check whether your trust deed automatically includes your partner or if it needs to be amended. Of course, professional advice is recommended due to the highly technical nature of these issues. For example, incorrectly appointing your partner as a beneficiary of your trust may inadvertently give rise to a “trust resettlement,” resulting in severely adverse taxation consequences.
Update your Will
While it may seem like simple common sense for most to update their will when circumstances change, it is no surprise that many often do not do so. Failing to update your will may mean that an external party, such as a Public Trustee may become involved in splitting your assets, which may result in divisions contradictory to your wishes.
Additionally, people usually tend to overlook their superannuation benefits. Some assume that their wills will automatically dictate where their superannuation benefits will go if they pass on. On the contrary, your superannuation benefits are not dealt with by your will and if you want to leave your superannuation benefits to a specific beneficiary, you will need to make a death nomination while you are alive.
Review Insurance Policies
As the natural progression of your relationship continues, you will also have to consider reviewing your insurance policies. You may need to add new policies to take into account your new relationship status, modify some of your existing policies or cancel policies that are no longer necessary. This may include taking out a new life insurance policy now that you are providing for somebody else should your life unexpectedly end or combine insurance policies that were previously in your own separate names or cancel your contents insurance policy over a property that used to be one of your separate homes but is now being rented out to tenants.
Whilst romance and finances may seem like worlds apart, it’s important to realise that they are effectively intertwined with one another and need to be taken into account. Inviting someone special into your life also means that you are inviting them into your financial world. Furthermore it’s important to remember that even if you are in a de facto relationship (as opposed to one that has been lawfully bound) the same issues apply. Under the law, your partner is treated as your de facto spouse if you have been living together in a genuine domestic basic, regardless of whether they are the opposite or same gender as you. This means the Family Court will accept claims made against one another; which is why it is vitally important to protect yourself and each other as the relationship flourishes.