Going through a divorce or relationship dissolution can be a challenging time irrespective of whether both parties are amicable.
Aside from legal implications (read Doctors and Divorce – Understand the legal journey ahead) and financial planning/insurance considerations (read Doctors and Divorce – Think current AND future financial position), there are a few divorce taxation issues that you need to be aware of and think about that will make your life easier in this highly stressful time.
Update of your legal documents
As part of the divorce process, it is vital to review and update important legal documents including:
- Trust deeds (specifically definition of beneficiaries);
- Powers of Attorney; and
- Superannuation beneficiary nominations.
While the above are items that typically require assistance from a legal practitioner, they can have tax implications for you and/or your family as well.
Beware of Capital Gains Tax (CGT)
The most common taxation issue resulting from relationship breakdown is considering capital gains after the transfer of CGT assets between divorcing parties.
Under S118-75 of the Income Tax Act 1936, legislation provides relief from Capital Gains/Losses in certain circumstances relating to marriage or relationship breakdown, where:
- you make a gain or loss in relation to a right that directly relates to the breakdown of a relationship between spouses; and
- at the time of the CGT event:
- you and your spouse or former spouse are separated; and
- there is no reasonable likelihood of cohabitation being resumed.
In determining whether spouses or former spouses have separated for the above, the factors considered in the Family Law Act 1975 S48 are examined, namely:
- The relationship has broken down irretrievably, or
- The separated parties have been living separately for a continuous period of no less than 12 months from the date of ‘separation’.
In order to obtain rollover relief, there needs to be a court order, a formal agreement (e.g. a valid Binding Financial Agreement), or award.
Don’t forget your jointly owned investments
Taxation of income (or use of losses) resulting from shared investments such as rental property is treated according to legal ownership. This means continuing apportionment between the relevant parties (including through the period of separation) until there has been a legal change or transfer of asset ownership.
Know about Family Trust assets and unpaid entitlements
While trusts may provide some asset protection for business and professional risk, they are not effective at quarantining assets from Family Law. If you require further information on this, it is recommended to consult with a specialist family law practitioner.
It is important to be aware that ‘Unpaid Present Entitlements’ (UPEs) resulting from declared trust distributions (including to spouses) are legal entitlements and deemed assets of the relevant beneficiaries. They would have been assessed on taxable distributions and have a legal entitlement to a payout of any beneficiary loan accounts in existence.
Lawyers will often examine the financial accounts of related trusts in order to determine whether such owed amounts are in existence as part of a settlement.
Consider the Medicare Levy Surcharge and health insurance
This extra tax is payable where you, your spouse or any dependants are not covered by appropriate health insurance and your income exceeds a certain threshold.
During separation of affairs, it is important to ensure there are no gaps in your private health insurance cover. In the case where you, your spouse (including a subsequent one) and any dependants are not covered for a full income tax period, there may be a pro rata amount of Medicare Levy Surcharge payable according to days of gaps/lapses in cover.
Take child support payments into account
Payments you make for the maintenance of a child need to be included in your income tax return. This is required as part of the income tests to determine your Adjusted Taxable Income. It can impact several items including; HECS/HELP repayments, Medicare Levy Surcharge, entitlement to Private Health Insurance government rebates and Centrelink benefits.
Your loans and banking will need attention too
In addition to the taxation issues, your lending position also requires attention once you have decided to divorce. At the ground level, if your accounts are in joint names while you are married, you need to open a new account under your name solely and start having your pay and benefits credited to this account only. If at all possible, the best solution would be to close off all joint accounts at the time things are officially ended with your ex partner. This also applies to credit cards, as you could be liable for any charges placed on the joint card. Even if your relationship ends amicably with your partner, also consider changing all your PIN numbers and passwords for your online banking as it’s possible that your ex partner may know them, or may be able to guess them.
While it might take some time to negotiate the transfer of larger loans, like a home loan, try to come to an agreement on the repayments of joint debt early on. Consider cancelling any redraw options on the loan, or at a minimum, ask your bank or you broker to require joint signatures for any withdrawals. Let your lender know you have separated so they can make a note on your file.
When the dust has settled, it could also be a good time to have a broker complete a credit check on you. This is a good way to check you still aren’t linked to a debt you had forgotten about (or may not even know about), be it joint or otherwise.
To avoid any unintended consequences, it is important that you consider all of the above and that you seek professional guidance to ensure you have the appropriate measures in place. If you would like to speak to someone in our team of tax or lending professionals please make an enquiry here.
You may be interested to read other articles on this topic:
Doctors and Divorce – Managing the financial impact of divorce in the medical profession
Doctors and Divorce – Think current AND future financial position
Doctors and Divorce – Understand the legal journey ahead
Disclaimer: * The information contained in this site is general and is not intended to serve as advice. DPM Financial Services Group recommends you obtain advice concerning specific matters before making a decision.