Separation, divorce, children and taxes
Money after separation or divorce impacts our decisions we make as women. It impacts our children, lives, lifestyle, our self-esteem and how most importantly we don’t speak about it enough.
The following guide has been written by our Senior Accountant, Rochelle Harrison. The reason why this is so comprehensive and detailed is that we have both been through this situation ourselves. Sucky and crap, but in this case, it has armed Rochelle with the knowledge of how to navigate this experience and how to help other women in similar circumstances.
Going through this process your self-worth is triggered and it’s quite common to doubt yourself. Your confidence, your looks, your abilities and your ability to make ends meet. This article helps you access the correct information and is based on circumstances for those earning income up to $100K.
FYI – we don’t hate men (we’re both happily married), we’re about education and sharing information should you need it.
Separation, divorce, children and taxes
Possibly after a few glasses of wine (or bottles) you’re wondering how your income as a singleton will affect your income tax return, childcare subsidy, family tax benefit and child support.
The good news is that there is some tax relief for a sole parent.
For those in receipt of a single parent or carer payment during the tax year, if your income was less than $50,119 then you may receive a maximum tax offset of $2,230. What this means in plain English, is that this tax offset reduces your tax liability or increases your tax refund.
If you are the sole carer of your children and your income is under $47,242 ($61,630 if you are a pensioner) plus $4,339 for each child, you may be entitled to a Medicare levy reduction. The Medicare levy rate is currently 2% of taxpayer’s income.
As a sole parent with dependents you are still assessed on family rates for the Medicare levy surcharge. This is different to the Medicare levy. If your income is under $180,000 (plus an additional $1,500 per dependent child) you will not be liable to pay the Medicare levy surcharge, even if you do not have private health insurance.
If you have lived in one of the areas on the zone list below for more than 183 days, then you should be eligible for the zone offset. This offset is not income tested and depending on where you live and how often your children were in your care, you could be eligible for an offset of $57 or more.
https://www.ato.gov.au/calculators-and-tools/australian-zone-list/
Divorce, children and Centrelink Part 1
The key here is planning! Firstly, you need to realistically work out your estimated income for the year and maybe a small buffer for error.
Secondly, update your income and marital status with Centrelink as soon as possible.
Thirdly, update your super fund binding death nomination form, ie change it from spouse/partner and your will.
Previously where your childcare subsidy has been calculated on a combined income, it is now assessed on your income alone and this will potentially reduce childcare fees, especially if you were not the primary income earner.
If your income is under $68,163 you will be eligible for the full 85% rebate. For every additional $3,000 of income you earn, the rebate will decrease by 1% (for taxable incomes up to $173,163, for higher income earners, please see the table by following the link below).
If you receive an unexpected bonus or take up a second job and have underestimated your income by $15,000, it will reduce your subsidy percentage by 5%. While this doesn’t seem like a large difference, if you have 2 children in care at $100 per day, 3 days a week, your day care fees are $31,200 before any rebate. Paying an additional 5% of $31,200 will result in a bill from Centrelink at the end of the year for $1,560.
Another important thing to note is that if you should re-partner that the childcare subsidy is based on combined income, even if the children are biologically not your partners. Noted that this is probably not something that you are considering (like ever) if you are freshly separated.
Single Parenting Payment (Previously known as Single Parent Pension)
Provided you satisfy the assets tests, the single parenting payment can be up to $780.70 per fortnight. This amount reduces by 40 cents in every dollar you earn over the threshold amounts. The threshold starts at only $188.60 per fortnight and increases by $24.60 for each child after the first.
You can receive a part payment if your income is less than $2,170.35 per fortnight, increasing by $24.60 per child if you have more than one child.
Divorce, children and Centrelink Part 2
Family Tax Benefits are support payments and are not taxable income. So what this means is that you do not need to include these payments in your income tax return.
Family Tax Benefit Part B
Family Tax Benefit Part B is simple. As a single parent, if your income is under $100,000 then you are eligible for the maximum rate. The maximum rate per fortnight is $158.34 when the youngest child is 0 – 5 year of age or $110.60 when the youngest child is 5 to 18 years of age. You cannot receive FTB Part B while you are receiving Parental Leave Pay.
Family Tax Benefit Part A
The following is a little more complicated as it requires you and your ex-partner to have agreed on a care percentage. This is based on how many nights the child spends with each parent.
You will need to apply for child support to be eligible for FTB Part A, and the more child support you receive, the less FTB you receive.
If you earn less than $54,677 you may receive the maximum rate of FTB Part A, and you will also be eligible for the Health Care Card. For those who earn between $54,677 and $98,988 it is reduced by 20 cents for each dollar over $54,677.
The exact calculation depends on your care percentage, the age of your children, how many children you have in your care, how much child support you receive and how much you earn. However, the maximum rate per child per fortnight is $186.20 for a child 0-12 years old or $242.20 for a child 13-15 and 16-19 (provided they meet the study criteria).
Here is a link to the calculator to get your estimate from Centrelink:
If your income is under $80,000 you should be eligible for the FTB Part A supplement. For the 2020 financial year the supplement is up to $766.50 for each child.
For detailed information on FTB A and B regarding payments and income tests, please follow this link
Child Support
Child support is both necessary and famously despised Australia wide by both sexes. Obviously, the system is not perfect, and unfortunately there is not a magic formula for every individual’s circumstances. It’s also not a job we could do.
The basic run down is that based on the care percentage, a cost percentage is aligned. This assumes that each parent provides for the child’s needs according to the time the child spends with that parent.
Then they work out how much it costs to raise a child, based on the parents combined income.
The cost percentage is multiplied by the combined income, after allowing for a self-support amount for each parent.
Below is a link to the percentages and costs discussed.
So how do all these different channels relate? And why is this on an accountant’s social media you might wonder? All the above payments are determined by how much you earn.
That’s why it’s so important when a relationship breaks down and children are involved to plan and know how much money is coming in. You need to be able to closely forecast how much you will earn each financial year. This can be very difficult if you run a business. You need to understand that even a small variation in your estimated income will affect each of the above payments.
Worst case scenario, you could end up with a child support or Centrelink debt. This will then need to be repaid, or if you are due a refund on your tax return, this refund is offset to those agencies before any monies are issued to you.
If this is the first time you are lodging as a sole parent, you need an accountant who is experienced in family accounting. A good accountant will ask you what may seem like very personal and probing questions regarding your family status to try to maximise your tax position. A simple mistake or omission by an inexperienced accountant can potentially lose you thousands of dollars that are critical in this transition period.
We can help. The above information provides links to freely available information, however this is general information only. Should you wish to book an appointment with one of our team, we have experienced female accountants who can guide and work through your specific circumstances.