Pooling your finances – is it a good move?

What financial issues should you consider before taking the plunge?

middle-aged couple sitting on couch looking at their finances

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.





    COMMENTS

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    Mez
    20th Jul 2017
    12:42pm
    Comment made that it is difficult to borrow again because of Carol's credit history of being bankrupt is INCORRECT!.
    The law is such that after 7 years of bankruptcy or insolvency, all previous records are annhialated or void making it possible to borrow again and start from scratch as there are no longer any records nor should any form have the right to penalise anyone by asking if thete was any time in the past of being declared voluntarily or involuntarily insolvent.
    Each case depends on one's level of debt and financial position of course but I have heard of many who have become very successful financially as a result of the humiliating experience of being bankrupt.
    A very valuable lesson learned, no doubt!
    Old Man
    20th Jul 2017
    5:09pm
    Mez, you may be correct but I have never seen a loan application that does not have in it the question: Have you ever been bankrupt, insolvent or assigned your estate for the benefit of creditors. An affirmative response then triggers a number of subsequent questions. If the answers to these questions satisfy the lender then the application may proceed.

    If I was a lender, I would consider it of great importance to know whether a person was previously bankrupt but, more importantly, how that bankruptcy occurred. I don't consider that an invasion of privacy, just sound lending practice.
    Maggie
    20th Jul 2017
    1:30pm
    If you are entering a new relationship later in life and are thinking of moving in together, Good Luck and lots of love and companionship. BUT be wise: by all means agree to share ALL joint expenses, utilities, rates, food, travel and so on, but never ever have more than one joint bank account and that just to deal with the above.

    Keep all your other assets separate. Make sure your powers of Attorney are NOT with your new partner. Of course they may be totally trustworthy but they are probably the same age or older than you and may not be able to cope when the time comes.

    Fine to leave a little something to your new partner, even the right to live in a home until death or a move stops that. If you are buying together buy as tenants in common common - it makes dividing things up a lot less complicated if things go wrong.

    A financial agreement (once called a pre-nuptial contract) is the best idea and will save you from all sorts of horrors such as a really difficult division of property. Be aware that if even if you live as partners and not as a married couple Family Law is applicable to you.

    A financial agreement can be made up to 6 months after you move in together, and cannot be made for I think less than 3 months before a marriage. This protects both partners from undue pressures.

    You need to know that in the event of death your estate has to provide for you partner's needs, if any, over and above any arrangements you make for your family in your Will.

    Getting married or just living together needs common sense and proper planning.
    Old Geezer
    20th Jul 2017
    2:46pm
    Remember it's always what his is mine and what's mine is mine too.
    Maggie
    20th Jul 2017
    3:17pm
    Not nice and not what I meant at all. I would never ever want to take anything that was not rightfully mine.
    Anonymous
    20th Jul 2017
    4:00pm
    Sure - that's what they all say, until divorce time
    then its grab all you can get out of the poor bugger

    Get a pre-nup or a legal contract drawn up. Why leave anything you worked so hard for to a person you only recently met .

    Leave your wealth to your kids and grandkids .

    Later on if she's worth it, then maybe consider changing the arrangement . DOn't want her to blow your wealth on herself and her family or gold diggers
    Anonymous
    21st Jul 2017
    2:36am
    Not a fair comment, OG and Raphael. Maggie is absolutely right. I know a woman whose marriage ultimately ended because she consistently refused to transfer her house into joint names. Her husband brought nothing but an alimony debt to the marriage. She owner her home. Had she agreed to his demands:
    (1) she might have been left homeless if the marriage broke down; and
    (2) instead of her home passing to her child on her death (who needed it due to suffering a disability) it would have been sold and the proceeds shared with his two children, who also stood to inherit a large sum from their mother (hence the woman's view that they should not also inherit from a step-mother they acquired well into adulthood!)

    In another case I know of, a child suffered the loss of a trust fund left by her late father (that should have enabled her to attend university) because her mother remarried and shared assets with a step-father who then wasted all the money, mortgaged joint assets, then left the family destitute.

    Later life love affairs can be risky. It's essential to insulate assets acquired before the affair began and only fair that if it doesn't work out, each should walk away with at least what they had before the union.
    Maggie
    21st Jul 2017
    4:23am
    You know it's really amazing how men always imagine they are the ones who are hard done by!!!! Poor old things they are. . . . I suspect that for every man who has a bad experience there is a woman too.

    There is not a single thing I wrote that suggested what I said was aimed only at women.

    Think about it. If my name had been Marcus instead of Maggie all the blokes would have been agreeing with me.
    Blossom
    21st Jul 2017
    6:34am
    If an account is in joint names one person can have the account frozen too.
    I'm not sure what the situation is if one person dies. I do know however that a few years ago a bank wouldn't honour a check which had been signed a few days before for a dog that was being boarded.
    particolor
    21st Jul 2017
    4:38pm
    You'll just have to Stop putting Hubby in the Boarding Kennel when you go for a Holiday !!:-( He complained Bitterly to the Bank by the looks !! :-( :-(


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