Optimizing Taxes as a Couple: Advice for Tax Time

Filing taxes as a couple in Australia introduces additional planning considerations compared to single filers. The Australian Tax Office (ATO) combines your joint income when determining eligibility for various rebates, offsets, and surcharges. Proactively reviewing your situation together and coordinating certain actions can help minimize your collective tax burden. Follow these tips at tax time to keep more hard-earned money while getting the most from Australia’s tax system as a couple.

Know the Income Impact on Private Health Insurance Rebate

The private health insurance rebate reduces your premium costs based on your income threshold. For couples, the ATO uses your combined taxable income to determine your rebate percentage. Higher joint income reduces how much subsidy you receive.

When your spouse starts working or increases earnings, be aware it could suddenly reduce your rebate the following tax year. To maximize subsidies:

  • Try keeping joint income under $180,000 to qualify for the maximum tier.
  • Split larger medical expenses between tax years if close to a tier cutoff.
  • Prepay premiums in the lower income year when your situation changes.
  • Have the lower earner purchase and hold the health insurance policy.
  • Time bonuses and investment gains that aren’t recurring to lower base income years.

Discuss strategies to manage joint income relative to rebate tiers each tax season. A bit of planning preserves more of your subsidy.

Avoid Increased Medicare Levy Surcharge Costs

If you don’t have private hospital cover, you may pay the Medicare Levy Surcharge on top of the standard Medicare Levy. This additional tax of up to 1.5% kicks in at different income thresholds based on your family status. For a couple with no kids, it applies once you jointly earn over $180,000.

Ways to reduce surcharge costs if your combined income often exceeds the threshold:

  • Purchase basic private hospital insurance. Even low-cost coverage waives the surcharge. Review annual costs of premiums versus surcharge to determine the cheaper option.
  • Shift income into the lower earner’s name when possible, such as investment and side business income.
  • Split discretionary medical expenses such as braces and glasses over two years to avoid spiking a single year’s income.
  • For self-employed individuals, maximize tax-deductible business expenses to reduce assessable income.
  • Time work bonuses and non-recurring income sources to non-surcharge years if flexibility allows.
  • If close to the cutoff, contribute more pre-tax to super to reduce taxable income.

The surcharge applies per person, so strategically managing joint income through these tips can save you thousands.

Maximize the Medicare Levy Reduction

If you or your partner have lower income due to circumstances like parental leave, part-time work, or retirement, the lower earner can apply to reduce or eliminate their Medicare Levy. The reduction threshold depends on joint family income, which includes the higher earner’s income.

To qualify for the maximum reduction for the lower-income partner:

  • Time returning to work after breaks to coincide with the higher earner having a lower income year as well.
  • Detail how many kids you have so the correct family threshold applies. Having more dependents increases the cutoff.
  • If earning above the threshold, take advantage of pre-tax super contributions, work deductions, and medical expenses to reduce assessable income.
  • Consider spousal contribution splitting to shift income from the higher earner to the lower earner’s super account, lowering the higher earner’s income.
  • Ensure tax agents have both spouses’ full earnings details to calculate the optimal combined reduction.

Coordinate to Claim Seniors and Pensioners Tax Offset

Once you or your spouse turns 65, the senior Australians tax offset reduces tax payable depending on your joint income. Strategies include:

  • Shift investment and side business income to the younger partner to avoid reducing the tax offset.
  • Draw down taxable retirement income evenly instead of the older spouse claiming it all.
  • For couples with larger age gaps, have the younger partner top up their super to maximize the tax offset opportunity later in retirement.
  • If possible, align the older partner’s retirement with a lower-income year for the younger spouse.
  • Contribute pre-tax to super accounts up to the $25,000 annual cap to optimize joint assessable income.
  • Claim any net medical expenses on the older partner for deductions to increase the offset.

Split Investment Income Strategically

How you divide interest, dividend, and rental income can directly affect your joint tax liability. Ways to minimize this:

  • Attribute income generated from one partner’s assets or super account to that spouse where possible for tax purposes.
  • Split income more evenly if there is a large gap between your marginal tax rates.
  • Shift income-generating assets to align ownership with lower income years or upcoming breaks for that person.
  • Structure investments so primary ownership gĂ„rnering the majority of income aligns with lower-earning spouse.
  • Equalize capital gain realizations rather than concentrating gains and tax burden.

Carefully Structure Super Contributions

Making deductible or after-tax super contributions from joint finances presents strategic options, but also risks if not coordinated:

  • Maximize employer contributions to the higher earner’s account first to benefit most from the 15% tax rate.
  • Make concessional contributions up to the $27,500 cap in the higher earner’s name if possible based on joint cash flow.
  • Split any excess concessional contributions to maximize the lower earner’s pre-tax retirement savings as well.
  • When contributing jointly, first use the spouse with lower super balance to enable catch-up contributions.
  • If your spouse exceeds their concessional cap, assess contributing after-tax to avoid overcontribution penalties.
  • Only make non-deductible personal contributions up to the $110,000 annual cap or when super balances are substantially unequal.

Thoughtfully structuring super payments as a team reduces tax and optimizes your combined balances long-term.

Filing Jointly Vs Separately: Not A Choice In Australia

In Australia, married or de facto couples do not have the option to file a joint tax return like in some other countries. Each individual must file their own personal tax return, as the Australian tax system is based on taxing individuals. However, it is important to note that certain details about your spouse’s income must be provided on your own individual tax return.
This requires including information about your spouse’s salary, dividends, rental income, and other relevant sources of income. The purpose of collecting these details is to accurately calculate various government levies, incentives, and determine eligibility for rebates. While being married does not result in paying less tax, it is worth mentioning that certain thresholds, such as the Medicare Levy Surcharge, may be higher for couples based on their combined income.
Moreover, if you and your spouse jointly own assets such as investment properties, it is necessary to declare the appropriate share of income and expenses from those assets on each spouse’s individual tax return. This ensures that the taxation process remains fair and transparent.
Furthermore, it is important to consider the implications of capital gains tax exemptions when selling a home. In Australia, capital gains tax exemptions only apply to one main residence. Consequently, couples who both own homes may now need to be aware of potential CGT implications.
In summary, while Australia does not offer the option of joint tax returns, married or de facto couples are required to share certain income details when filing individual tax returns for taxation purposes. It is imperative to adhere to these regulations to ensure compliance with the Australian tax system. Each spouse should carefully report their income and expenses accurately to meet the requirements of the tax authorities.

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