levy reduction or exemption
• Medicare levy surcharge
• net medical expenses tax offset
• dependant (invalid and carer) tax offset
• senior and pensioner tax offset
• spouse super contributions tax offset
• main residence exemption for capital gains tax.
It is not unusual to find a couple where each owns a main residence that was acquired before they met. However, spouses are only entitled to one main residence exemption for capital gains tax (CGT) purposes between them. If both members of a couple own a main residence they must do either of the following:
• select one residence for the exemption
• apportion the CGT exemption between the two residences.
Provided the homes meet the requirements for the main residence exemption, they will both be wholly exempt from CGT for the period prior to the couple being treated as spouses. However, from the time the couple became spouses, only one exemption is available, though this may be divided between the two dwellings.
Mary bought a house in 1992. She lived in it right up to the day she married Matthew in 2006 and moved into his house, which he had purchased in 2000. As they elected to treat Matthew's house as their main residence, Mary will be subject to CGT on her house from 2006. She will not be liable for CGT on any capital growth in the 14 years prior to becoming Matthew's spouse.
2 INCOME SPLITTING
Income splitting is a legitimate tax-planning tool and one of the easiest strategies to implement. There are a few simple strategies for you to follow and they all mainly revolve around the marginal tax rates for yourself and your spouse, both now and in the future. The tax rates for individuals, not including the Medicare and other levies, are shown in table 1.1.
The goal is to try to level the income of couples so that they are paying tax at the same marginal rate. While income from personal exertion (such as your salary) cannot be transferred to the other partner, there is scope to have passive income from investments transferred if the assets are held in the lower-earning spouse's name.
Table 1.1: tax rates for individuals excluding levies (2017‐18)
Source © Australian Taxation Office for the Commonwealth of Australia.
It amazes me how many smart business people are really dumb when it comes to reducing tax. Too often I see rich business people paying the highest tax rate (47 per cent including medicare levy) on interest or dividend income while their spouses don't fully use their $18 200 tax-free threshold. With a $1.6 million transfer balance cap on superannuation coming into effect 1 July 2017, there is an opportunity to split superannuation contributions between spouses such that each spouse maximises their respective $1.6 million thresholds before they retire.
Ensure that all investments are in the name of the lower-earning spouse so that they can take advantage of the lower tax rates (particularly the first $18 200, which is tax-free) on any investment income derived. Likewise, have all passive deductions, such as charitable donations, in the higher-earning spouse's name as they may get a return of up to 47 per cent, depending on their income level.
The best tax outcome can be achieved with a low-income earner holding investment assets. They could earn up to $20 542 tax-free (see p. 14), receive a refund of all imputation credits and pay less tax on capital gains.
If an investor on the top marginal tax rate of 47 per cent had a $100 000 capital gain they would pay $23 500 in tax and Medicare levy. If an investor with no other income had a $100 000 capital gain they would pay $8797 — a saving of $14 703.
Any tax benefit derived by transferring an income-producing asset from one spouse to another may be lost if there is CGT to pay on assets originally acquired after 19 September 1985.
If you transfer an income-producing asset to your spouse you may need to find out the market value of the asset from a professional valuer. This is regardless of what you actually receive because the transaction is not independent nor is it at arm's length. In this situation either party could exercise influence or control over the other in connection with the transaction.
If you do not have a spouse, or you are both in the highest tax brackets, consider creating an investment company that is taxed at a flat rate of 27.5 per cent (or 30 per cent if your company has an annual turnover above the small company threshold of $10 million) for all income.
3 DEPENDANT (INVALID AND CARER) TAX OFFSET
The dependant (invalid and carer) tax offset (DICTO) is only available to taxpayers who maintain a dependant who is genuinely unable to work due to carer obligation or disability.
The DICTO has consolidated the following tax offsets:
• invalid spouse
• carer spouse
• housekeeper
• housekeeper (with child)
• child housekeeper
• child housekeeper (with child)
• invalid relative
• parent/parent-in-law.
The ATO may deem you eligible for the DICTO if the following applies:
• you contribute to the maintenance of your spouse, your parent (or your parent's spouse), your child (aged 16 or over) or siblings (aged 16 or over)
• your dependant was being paid either:
— a disability support, a special needs disability support or an invalidity service pension
— a
