Managing tax when investing as a couple
How to optimise your returns
I recently wrote on how to maximise your outcomes as a dual income household. There are many benefits that allow you to get to financial goals quicker and more efficiently with pooled resources if you are structured effectively.
However, joint investing also introduces an added level of complexity around taxation. You may have disparate incomes, varied career breaks, and you’ll need to decide how income is split from investments. There are options to minimise unnecessary tax by understanding the mechanics behind joint investing.
Ownership structures
Before diving into tax strategies, it’s worth understanding how joint investments can be structured in Australia. There are three common structures.
Joint tenants
Both parties own the asset equally. If one partner dies, ownership is automatically passed onto the surviving partner. Income and capital gains are generally split equally for tax purposes. Investing as joint tenants simplifies the ownership structure and automates survivorship.
Tenants in common
Each partner owns a defined proportion of the asset which can be unequal. This structure provides more flexibility for estate planning and tax strategy because income, capital gains and losses can be assigned according to ownership percentages. For example, one partner may be on a lower marginal tax rate, and you could lower overall taxes by choosing to attribute a higher ownership proportion of the investment to them.
It is important to recognise that splitting with no basis of genuine economic ownership may trigger scrutiny from the ATO to ensure the structure is not being used purely for tax avoidance. To prove economic ownership, the capital base or additional investments must be proportionate to the ownership percentage.
Trusts or Company structures
There is an option to invest in family trusts or private companies. These are legal structures that add some administrative complexity but can offer flexibility for income distribution and tax planning. Tax benefits arise when there are other individuals involved in the trust that are eligible for income distributions. I’ve written about trusts and companies before, and the types of investors they may suit.
For most situations, people will invest using the joint tenant or tenants in common structure.
Income tax
In general, income tax will be assessed based on the ownership share of the assets. Any deductible expenses can also be allocated proportionately for tenants in common. One common example of allocating deductible expenses is investment property where both income and expenses are proportionately allocated. It is more beneficial for the partner on a higher marginal tax rate to receive a higher proportion of the deductible losses, in most cases.
Capital Gains Tax (CGT)
The same rules for joint tenants and tenants in common apply for CGT. However, there’s added complexity with capital gains, such as offsetting against capital losses. If one partner has unused capital losses from prior years, the tenants in common structure can minimise tax paid by allocating proportionately. Both partners can access the discount independently, and proper allocation can maximise the benefit particularly if partners are in different tax brackets.
Superannuation
Superannuation has provisions for spousal contributions and contribution splitting.
Spouse contributions
Spouse contributions allow one partner to contribute to the other’s superannuation and receive a tax offset of up to $540 if their income is below $40,000. This provision is particularly relevant for a couple with one member taking a career break or on reduced income due to caring responsibilities
Contribution splitting
Contribution splitting allows the splitting of concessional contributions in a financial year with your spouse. You can split up to 85% of the amount (allowing for the 15% tax). This can also be helpful during career breaks or caring responsibilities to ensure that both spouses’ superannuation balance continues to grow. If there’s an age gap between spouses, contribution splitting may be used to transfer funds to the older spouse if they are nearing retirement. This allows access to the funds earlier, and at a lower tax rate.
How to document your ownership
To document your tax strategies, ensure that you have records of:
- Contributions showing each partner’s input into joint accounts
- Ownership agreements for tenants in common
- Income, gains and losses allocated according to ownership proportions
Ensure the allocations are reviewed regularly and continue to align to changing life circumstances which may include marriage, children and changing salaries that may shift tax strategies.
Final thoughts
Tax can materially affect net returns. Keep these tips in mind:
- Ensure you have structured your joint investments to be as efficient as possible.
- Understand ownership structures, document your contributions and allocations, and integrate tax planning into both of your retirement strategies.
- Ensure that you regularly review your tax strategy as life circumstances change.
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