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Question about CSA and rental income

Hi everyone,

I've been doing my head in trying to figure this out. Hoping someone can help.

My husband pays CS for two children. Their mother doesn't work. We both work and have two kids of our own. He has always met his obligations and understands that it is important, although we are a little bit sick of carrying the can completely because his ex doesn't want to work.

We have been given a fantastic opportunity to move away for work (not too far so he can still see his other kids) and we are unsure whether we should rent our house out or sell it. I am confused about adding back "rental losses" in the child support liability and exactly what they add back.

Here is the scenario. Say my husband earns $80K. If our annual mortgage repayments are $24K and rental income is $20K would they consider that to be a $4K loss - so he would be assessed as having earned $84K - or would they add on the ENTIRE rental income of $20K and assess him as having earned $100K? As this wouldn't be tangible money - just the mortgage continuing to pay for itself while we rent or buy somewhere else - it's not like we would have the capacity to pay his ex wife that extra money.

Any advice or if anyone can point me in the direction of somewhere that would have this sort of info greatly appreciated.
Unfortunately your rental income will be added to his other income as the negative gearing will not be counted, (however it would be for Centrelink purposes such as FT A & B,), therefore for a CSA assesment they would asses his income as $100K, although Centrelink would take it as $76K.

CSA had the rules changed some time ago as many PAYERS were buying investment properties, negative gearing them to the max and reducing there assesable income down to a very small amount.

Maybe a Change of assesment could be done to:

1. Consider the mother's ability to work/earn an income; and

2. Maybe you could plead your case re the rental income, OR you could seek a private agreement with the childrens mother.
I had hoped that it would just be the loss part. We're not trying to reduce his income which is what I believe they were trying to stamp out int he first case.

So if that were the case, more than happy for the loss to be added back on to put it back to what it would be if there was no investment property. But not the whole income - as I said it's not money we would actually HAVE to be able to pay the ex more with.

No hope of a change of assessment regarding her capacity to earn. The advice I have had previously is because she was a stay at home parent when she and my husband broke up (kids were aged 1 and 2 at the time) all these years later she has no obligation to go back to work.

She also has another child with her new husband, who is a preschooler. Because we pay so much to her because she doesn't work (and has no "obligation" to work) I work full time even though my husband and I have two preschoolers of our own. She gets all the FTB, we don't get any because we earn too much.

All we want to do is get ahead a little, but it seems everything is geared towards helping his ex wife out. Once more this would be a brick wall.

I'm so sick of this.
Afternoon folks

A quick question… is your current home in joint names?maybe you could get a friend to rent your home & do a private rental agreement?

Cheers P2P
Hi P2P.  The house is in  both of our names. The only reason we have it is because I sold MY old house to use as the deposit on one big enough to have room for his kids EOW - he left that relationship with nothing but a few sticks of furniture, massive debt and a 20 year old car.  However the only way we could get a mortgage on this house was to include both of our incomes.

I like the idea of renting to a friend, but unfortunately I don't know anyone who would be able to. All our friends are mortgaged themeselves already, or couldn't afford the amount we're talking about.

I wonder if you could get a real estate company to manager your house & send the money to your bank account & not his?
Don't know. I guess the only way they'd look deeper is if there's a COA?

What's a COA?

OK, what's a COA?
COA stands for Change of Assessment (in special circumstances), which is a departure from using the formula assessment allowing amounts to be varied. You may be interested in looking at the CSA Guide in regard to change of assessments. The section is 2.6.

Here's a link The CSA Guide - 2.6 Change of Assessments in special circumstances

Rental property losses

I don't think what AJ44 has said is correct.

On my reading of the below from the Parents' Guide on their website, your husband's CS income would still be $80K. Ie, for tax purposes his income would be $76K ($80K salary minus $4K losses) and CSA would add the $4K losses back on - have a look below:

What income do we use for child support?

A broad range of income amounts are taken into account to work out your child support payments, for both parents. We add up these amounts to get your adjusted taxable income, which is based on your last completed financial year of income.

Your adjusted taxable income comprises the following amounts.

Taxable income

This is the income shown on your tax return. While the formula uses taxable income, the impact of tax on your disposable income is taken into account when we work out the costs of raising your children.

Note: Some income support payments are taxable, some are not.

Gross reportable fringe benefits total

This is the value of gross reportable fringe benefits for the income year, which is reported on your payment summary. Or ask your employer to tell you the expected amount for the year.

A fringe benefit is a benefit provided to you because of your employment. Examples include using a work car privately, low or no interest loans for employees, or a living away from home allowance.

Target foreign income

This is any foreign income you receive that is not taxable income or a fringe benefit.

Net rental property losses

A net rental property loss is where you have a rental property and the costs outweigh the income. We add any loss back on to your taxable income for child support purposes.
Sunnyside that was what I had thought too when I looked at the CSA site. But I got confused by it.

This bit specifically:  "We add any loss back on to your taxable income for child support purposes."

I couldn't work out if ANY loss includes the entire mortgage amount.

Some observations:

Your initial scenario is correct.

With the scenario you have given, your actual rental loss is likely to be more than 4k after all the other costs and deductions are applied.

You need to work out if you are better off or not by claiming your rental loss. If for example you claim a rental loss of 10k you will get 3k back in tax but may lose 2k in family tax benefits and pay 2k extra in child support.

It might be better not to claim the rental loss. You are not compelled to make such a claim on your tax return, although the ex could initiate a COA and this could be revealed during the process.

Since you are half owner then the extra child support for hub to pay will only be based on his share of the loss claimed.

If however the rent received was equal to your rental deductions/costs then your problem is solved.

Either find a way to get enough rent to cover all costs or don't claim any rental losses in your tax returns.
HappyDaze thank you for that. It is food for thought.

Not worried about losing any family tax benefits. We don't get a brass razoo there. We are too "rich".

The scenario I gave was based on 100% of the property being included in my husband's tax return… not the 50% it should be in reality. I get very nervous about child support issues. I would not put it past them to add in the entire amount.

So if this is correct and we do have a slight loss (maybe more than the $4K overall I estimated on some very crude figures) then he would be assessed as having earned $82K (possibly up to $85K). I think I could live with that. In the scheme of things that extra CS would be negligable.

The ex has never had any cause to initiate a COA yet… I think we'd just have to tell the stepkids that we sold the current house in case she gets a whiff she might be entitled to more money. Would love to see if she would do a private agreement, but we know her too well: it's all about money for her. She once got the CSA attack dogs hassling my husband over $6 that was underpaid at the start of a new assessment period thanks to an administrative error from his payroll department. There is zero trust there - we know her too well unfortunately.
That is right, only the loss is added back in.

Always make sure you claim everything you can, but make sure expenses that could be against wage income as opposed to rental income are claimed against the wage income.

That way it is not regarded as "loss".
Hey another question - if he does have losses added back on to his CS assessment, does his ex wife see that?

So when the new assessment comes out from the CSA, will it tell her "Your ex husband's income was x including rental losses of x and your new child support amount is x"?

Or would she just be told the basic "Your ex husband's income is x and your new child support amount is x"?

I just hate this woman knowing more about our affairs than I believe she is entitled to. I know he used to be married to her but a) she left for someone else so that should be the end of her "entitlement" to our information b) *I* was never married to her so I hate her knowing anything to do with me (eg in this case property income details) and c) my husband and I have been together now much longer than they ever were, yet for some reason she gets to see everything we do and to many extents dictates our lives.

The ex only sees the taxable income, as assessed by ATO.  Can predict ex will be unhappy because they will expect the gross rent to be added back.
I'm no tax lawyer, but… you might want to check first that the mortgage payment is deductible at all.

1/ it will only be the interest portion that can be deducted; capital repayment is not deductible (but happily, interest probably accounts for most of your mortgage payment…)

2/ interest is a tax deduction only if the loan was taken to produce assessable income… which rules out the family home mortgage

If you purchased the house recently, you could perhaps argue that the intention was indeed to rent it out, but that you are first preparing the property for renting and simply taking advantage of what would otherwise be an unoccupied house.  I doubt you'd be able to claim expenses (including interest) for the period that you live in the house, although perhaps if you were to pay yourself rent…

Also, this is from a tax point-of-view; perhaps the CSA have more reasonable rules to cover your situation (!?!).  Probably not, but worth following up.  Both the tax office and the CSA can be telephoned anonymously - call them up and run the scenario by them.  You might not be any better off, but you won't be any worse off either.
Sorry scram, I'm lost.

We have owned this house for five years and it has been the family home for that period of time. There's no way we could claim it as an investment as the family home - that's not what I was asking about.

We are moving away so we will either need to sell the house, or convert it to a rental property.

We will most likely buy a new house at the new location - again, not something we would be trying to make any taxation claims on.  

I was simply trying to work out whether it is worth hanging on to our current property as a "nest egg" for the future, or if the CSA implications for the next 10 years would make it a pointless exercise.

"2/ interest is a tax deduction only if the loan was taken to produce assessable income… which rules out the family home mortgage"

This doesn't make any sense to me - there are lots of people who rent out a previous home for whatever reason and are able to negative gear it. It would be absurd to think that because it was EVER the family home we aren't able to claim tax deductions for it if it STARTS producing income.

I'm lost.

My fault. Sorry. I have a friend who was in a similar-but-not-identical situation, andthey were unable to claim mortgage interest against rental income.

There's no way we could claim it as an investment as the family home

Agreed. Once you rent it out, I'd expect that the usual rental property rules apply. Except perhaps regardingCGT -if you rent (rather than purchase) and live elsewhere, then I think you can continue to claim the primary residence CGT exemption on your old home for up to six years. Check withyour accountant.

there are lots of people who rent out a previous home for whatever reason and are able to negatively gear it

But only if there is an existing loan used to purchasethat property (which, happily, you have), and only the interest, not the capital repayment. You need to be very careful if you're considering refinancing in any way, to make sure that the interestis still claimable. If you increase the loan(eg, redraw) in order to help purchase a new (non-income-producing) home, I suspect the extra interest will not be claimable (or maybe it could be, but only if it's increased before it becomes a rental property -I'd be running that by your accountant, and double-checking it with an anonymous call to the tax office).

I think the end result in your case will be that, because only the interest portion of the $24K mortgage payment is claimable,the issue of the ~$4K rental loss won't arise. The interest on the existing loan should be claimable, and thus your partner'sincome won't rise by much, if anything. If there is a net loss (ie, negative gearing), it will reduce your taxable incomes (ie, yours too, assuming the property is jointly-owned), but will not reduce your partner's CSA-calculated income, because (their share of) the net loss will be added back to their taxable income.

Centrelink have different rules again, eg, deemed income from cash and liquid investments. Bonus. Tax accountants, rejoice.
"But only if there is an existing loan used to purchase that property (which, happily, you have), and only the interest, not the capital repayment.  You need to be very careful if you're considering refinancing in any way, to make sure that the interest is still claimable.  If you increase the loan (eg, redraw) in order to help purchase a new (non-income-producing) home, I suspect the extra interest will not be claimable (or maybe it could be, but only if it's increased before it becomes a rental property - I'd be running that by your accountant, and double-checking it with an anonymous call to the tax office)."

Oh yeah,  sorry I am with you now. This is all stuff I'm trying to work out too, in addition to the CSA implications. Whether overall it is worth doing this or just selling it.  We've had some preliminary chats with a mortgage broker. The idea seems to be that we would be best to refinance and have a "split loan" with the express purpose that the portion of the loan covering the existing property would be as an investment and a new property would be the family home.

I am yet to speak to an accountant.

My other thought is maybe we just sell it and in the next few years we buy some units or something if we can as an investment.  I'm accutely aware that now (as my husband is approaching 40) is the time we really need to look towards our future post retirement. I would hate to think that we would be hampered from that for the next 10 years just because he had poor judgement in his late 20s and was briefly married to a money hoover.
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