Pooling your finances – is it a good move?

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Many people make a promise to share a life together – for richer or poorer. But all too often a good relationship can be pulled apart by money issues. This could result from different views on how to handle money, different expectations or poor planning.

Before making the leap to move in together, agree on how to organise finances. Some decisions may be based on lifestyle choices, while others may be based on your views about money. But you also need to consider the impacts of:

  • death or disability
  • Centrelink entitlements
  • taxation and Capital Gains Tax
  • debt management
  • estate planning.


Planning your finances
There is no right or wrong way to do this, but it won’t work unless it is a joint agreement. This means you really do need to plan your finances as a couple.

When we were young and hadn’t saved much, this might have been easier than as older couples who have each already accumulated wealth and have separate families.

You should decide whether to open joint bank accounts or to keep finances separate, and how to share common expenses. The decision might be influenced by:

  • the lifestyle you want 
  • your financial goals and how they will be affected if one person is not as financially comfortable as the other
  • concerns about protecting inheritances for children from previous relationships.

Even if you do pool resources, it is important to maintain some independence. Make sure you always have access to some money in your own name in case of emergencies or unexpected events.

Centrelink entitlements
If you apply for Centrelink or Veterans’ Affairs (DVA) benefits, your payment amount depends upon your assessable income and assets. If you are living with someone as a couple, the assessment is based on combined assets and income. So while you may agree to keep your assets separate, Centrelink and DVA won’t see it this way. This may create financial difficulties for a partner who has fewer resources unless some sharing of finances is considered.

Defining a couple
Two people living together are considered to be a couple if they are partners in a relationship. When making this assessment, Centrelink may take into consideration:

  • the financial aspects
  • the nature of the household
  • the social aspects of the relationship
  • any sexual relationship, and
  • the nature of the commitment to each other.

Couples can be legally married or living in a de-facto relationship, including same-sex partners.

His home or her home
Your home can be one of your most tax-effective investments, because you don’t pay tax on the increase in value.  However, you can only claim an exemption on one home, and if you are a couple, this means only one home between you both.

You may need to decide whose home will continue to be tax free. Alternatively, you could choose to share the exemption so that half the growth on each house is tax free, but this may have an affect on tax concessions if you decide to rent one of the houses. It is important to seek professional tax advice.

An exception might apply if you bought your home before 20 September 1985 – the date when Capital Gains Tax (CGT) started. CGT is not payable on assets purchased before this date.

Example:
Harry and Beth recently married and moved into Harry’s home. Beth has decided to keep her home and rent it.
They elect to nominate Harry’s home as the main residence so it keeps the CGT exemption – i.e. he will not pay any tax if he sells his house in the future. Beth should get a valuation on her home, since the future growth is subject to CGT.

However, Beth’s home will now be considered an investment property, and she may be able to claim tax deductions for the expenses (including interest on any outstanding mortgage).

If you are buying a new home together, you should talk about whether to buy it as joint tenants or tenants in common. This will affect your estate-planning options.

Debt management
Relationships require trust and honesty, but it is also important for both partners to keep an eye on joint financial arrangements, especially where debts are concerned. If you have debts in joint names, you can be held liable for the full debt, not just half of the debt.

Example:
Carol’s marriage recently broke down. They had a mortgage on the home and her husband had borrowed money for his business.

The business loan was in his name but was secured against the home, which was in joint names, so Carol had signed as guarantor.

After selling the home and all other assets, they still owed $100,000. Carol was forced to declare bankruptcy. Her bankruptcy period is due to end soon. She is faced with the challenge of re-establishing her life at the age of 45 but will find it difficult to borrow again with her credit history.

Luckily Carol has a good job and still has her superannuation, because it was protected from bankruptcy.

Tips for minimising debt problems:

  • don’t sign loan documents without fully understanding the implications
  • check that your partner can’t increase debts without you both signing (including on lines of credit)
  • review statements and bank records so you know how much you owe.


Tax implications
Liability for tax is generally based on your individual income, but some concessions or liabilities are based on combined income. Two traps to be particularly aware of are:

  • eligibility for the Commonwealth Seniors Health Card (for self-funded retirees) is based on combined taxable income
  • the Medicare Levy is payable if your combined income exceeds $180,000 (higher if you have more than one dependent child) and you do not have private hospital cover for you both.

Estate planning
What happens when one of you dies? Would the other partner be financially secure or be able to stay in the home?

With second or subsequent relationships, estate planning may need to balance how to look after each other against the inheritance interests of children. This is likely to require more than a simple will that passes on all your assets to your surviving partner and should not be done with a DIY will kit. Spend the time and money to get some sound legal advice.

You might also want to look at options such as:

  • life interest in the home for your partner
  • how to pass on assets to your children
  • the use of family trusts.

Example:
Ed and Hanna have been married for 15 years and live in a house that Ed owned prior to their marriage.

They both have children from previous marriages and have agreed to leave assets to their respective children upon their death. This means Ed plans to leave his home to his son Phil.

If Ed passes away first, this may leave Hanna at the mercy of her step son who may want her to move out of the home. One option is to leave the home to Phil but with a life interest for Hanna so that she can live in the home for as long as she wishes.

You should also review the death benefit nominations on any insurance policies and superannuation accounts.

Building a solid relationship
Open and frank financial discussions early in your relationship are important and may help to save your relationship.

To ensure you cover all the important issues and understand the consequences you should consult a financial planner, a lawyer and an accountant and ideally get them all to work together so you can develop a well-structured plan.

When you are talking to your advisers, you might also want to discuss the implications of making a binding financial agreement (also known as a prenuptial or prenup) to agree on how to divide assets if the marriage does break down.

Divorce and money – now, that’s a whole other set of complications.

Louise Biti  CFPMTax BEc BA(AS) Dip FP
Director
Strategy Steps

Disclaimer: The information in this article is general and does not take into account your particular circumstances. We recommend specific tax or legal advice be sought before any action is taken and refer to the relevant Product Disclosure Statement before investing in any product. Strategy Steps Pty Ltd ABN 14130045242, AFSL 333649.

Written by Louise Biti



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