Relationship breakdowns are stressful, (especially when kids are involved). Along with experiencing a wide range of emotions including fear, uncertainty for the future, anger, sadness, loneliness, isolation and a sense of failure; you still need to pick yourself up and keep running your life and managing your affairs in general.
We’ve created this article with the intent of providing a guide / checklist to anyone going through this stressful time in life in order to help you stay on track financially and understand some of the tax / tax return implications that may arise for you. Please note this is my guideline only and not a substitute for specific advice relevant to your personal situation that you’ll need to obtain from your lawyer and accountant. In fact, even in seemingly uncomplicated cases, I strongly recommend consulting a tax adviser to avoid any unforeseen tax consequences.
Child Support
Child support is not considered taxable income. By the same token, any payments to an ex-spouse for child support is not tax deductible. Child support payments may affect Family Tax Benefits (from the ATO) received by the individual receiving child support.
Family Tax Benefits (FTB) provide a two-part payment available to eligible families to assist with the cost of raising children:
- Part A: A payment is made for each eligible child, and this is determined by the family’s financial circumstances; and,
- Part B: An additional payment is provided to families who require extra financial support.
If a parent’s child support payments increase or decrease, this will affect the amount of Family Tax Benefits they will be eligible to receive.
Spousal Maintenance
Spousal maintenance represents a financial support mechanism provided from one party to a marriage or de facto relationship to their former partner or spouse, especially when the recipient is unable to sustain themselves financially. Similar to child support, spousal maintenance is not treated as taxable income and cannot be claimed as a tax deduction by the paying individual.
Capital Gains Tax
Capital Gains Tax (CGT) is a tax levied on the profits or gains arising from the sale or disposal of certain assets. These assets typically include real estate, investments such as stocks and bonds, business assets, and other capital assets. CGT is applied to the difference between the sale price of the asset and its original purchase price or cost base. In essence, when an individual disposes of a capital asset at a price higher than its acquisition cost, the resulting gain is subject to capital gains tax.
Rollover relief refers to a provision in tax law that allows taxpayers to defer or postpone the recognition of capital gains tax (CGT) or other taxable events when certain conditions are met. Instead of triggering an immediate tax liability, the taxpayer can “roll over” or defer the gain to a future date, typically when a specified event occurs.
One common scenario where rollover relief is applicable is during the transfer of assets between related parties, such as in the case of divorces. If assets are transferred between spouses or former spouses, rollover relief may apply, deferring the capital gains tax until a later date, such as when the recipient sells the asset. This provides flexibility and helps avoid immediate tax consequences during significant life events.
Superannuation
In the context of a lengthy relationship where both parties had limited superannuation at the relationship’s inception, it’s common for them to engage in a superannuation split. This process aims to equalise their superannuation interests by totalling the values of both parties’ superannuation, dividing it by two, and then transferring a portion of one party’s superannuation to the chosen fund of the other party. The outcome is an equal distribution of superannuation between both parties.
However, this standard approach may not always apply. Through direct negotiations or with legal assistance, parties might customise a superannuation split that aligns with their specific preferences, integrated into an overall property settlement package. For instance, one party might seek a larger portion of cash assets for property acquisition, while the other, nearing retirement, may prefer retaining their super. In such cases, the party opting for cash assets might forego some superannuation entitlements to secure a more favourable share of cash assets during settlement.
Other Tax Return considerations
- Filing Status: Your filing status will change after a divorce. In Australia, you are assessed as a single individual once the divorce is finalised. If you don’t want your ex-spouse’s income to be included on your tax return, you can update this when you complete your next tax return. Choose “no” when asked if you had a spouse during the full income year. However, if you were still together during the financial year, you’ll need to include the dates in the financial year that you had a spouse and their income for that period on your return.
- Medicare Levy Surcharge: If you had a family Medicare levy reduction before the divorce, be aware that your eligibility may change. Adjustments to your income may affect your liability for the Medicare Levy Surcharge.
- Private Health Insurance: If you had family health insurance coverage, reassess your coverage needs as your family structure changes. Be aware of any tax implications related to private health insurance.
- Financial Planning: Consider reviewing your overall financial plan in light of the divorce. This may include reassessing investments, updating beneficiaries, and planning for your financial future.
- Name Changes: If you change your name after the divorce, notify the Australian Taxation Office (ATO) and other relevant authorities. Ensure that your tax records reflect your legal name.
Managing the emotional, financial and logistical aspects of a divorce are usually extremely challenging. Throw in a challenging job / long working hours / kids / a business and it will often be one of the most difficult periods in a person’s life. For this reason, it’s so important to take care of yourself, rest, eat properly, exercise and ensure that you carefully consider all of the above factors as they relate to you with the help of an accountant and a lawyer as required.
