When couples start thinking about merging their money or other assets, it is often from the understandable feeling of “what’s yours is mine” Merging assets can work well, but it’s very much dependent on your specific circumstances.
By Anthony Bell.
There are usually a few tricks for the unwary and generally the two biggest issues to consider are:
- Asset protection
- Tax minimisation
Sometimes you can achieve both asset protection and tax minimisation, but where you have to choose, asset protection should always be the priority. Protect what you have now individually and what assets you may accumulate in the future together, before you worry about saving tax.
Your accountant can examine your circumstances and advise you the best way to protect your assets as this will vary greatly person to person but may involve making one of you the asset holder and the other the risk bearer.
You might think it’s a good idea to transfer assets such as property and shares into joint names. This can be a costly exercise. When it comes to property, stamp duty will apply to half of the market value of the property as in the law’s eyes, you are literally selling half your stake to your partner. Similarly, you may be up for capital gains tax on the sale on half the property (other than the home you live in).
Ironically, when a property settlement occurs with the court’s consent when a marriage or a defacto relationship (in some circumstances) breaks down, it will usually be possible to avoid stamp duty and capital gains tax on transfers of property.
Speaking of defacto relationships; a word of warning. The same rights to obtaining a property settlement from a defacto relationship exist as they do for married couples where;
- The relationship has lasted for a total of all period or at least 2 years; or
- There is a child from the relationship
Note though that other factors apply that may also mean the same rights exist even if the above conditions are not met, so if you’re not sure and you’re worried, please seek legal advice.
Even simply merging bank accounts can have tax consequences. Where you operate a joint bank account, any interest you earn on that account will be split 50/50 when it comes to including this interest in your tax returns. So you may want to have your bank accounts in the name of the person who is in the lowest marginal tax bracket.
Equally though, there can be positive tax planning opportunities that can take advantage of one partner being in a lower tax bracket than the other. Often this can be best achieved when assets are acquired in the future rather than by transferring assets between you now.
If you’re worried about the consequences of merging your money with a new partner where there are considerable amounts involved, it may be possible to enter into a Binding Financial Agreement where the parties can agree how assets are to be split in the event of a breakdown in the relationship. Whilst this can be a good idea in theory, it can obviously be a difficult topic to broach and requires a high level of understanding between the parties.
If you are requested by your partner to enter into such an agreement, you should of course seek legal advice on what the consequences for you will be if you go ahead with it.
Often, the question of merging money comes down to trust between the two of you as much as anything.
If you do merge your money, the biggest mistake couples can make is having not talked about some basic ground rules about spending money that both of you are comfortable with. This doesn’t mean having to account to each other for every cent you spend as maintaining some independence is often a good thing, but being transparent once your money is merged is very important.
It might seem basic, but setting a personal or household budget together is a great way to agree upfront when and on what you will spend your money on. This personal planning process is a proven way of maximising your savings. It’s far easier to talk together about your expenditure plan upfront; it’s a much harder discussion once the money has been spent.
There is usually little reason to rush into merging your assets unless there are specific asset protection or tax minimisation reasons that will benefit you both.
When it comes to merging money and other assets, any significant financial decision should really be checked with your accountant or financial advisor as making an innocent well intended mistake could be costly to you both.
By Anthony Bell.
For professional assistance: www.bellpartners.com