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Taxable Income

Taxable Income and losses

Can I get someone to point me in the right direction for some information please?

How does CSA calculate income when it comes to net rental investment losses.

Taxable income assessment is, lets say $50K, but investment losses of lets say $20K are added to make an income of $70K

I have had a look at various sites and legislation but can't quite get my head around it all and some things seem contradictory.

Thanks in advance

"When there is no enemy within, the enemies outside can not hurt you"

Executive of SRL-Resources
I don't think that the CSA work them out (an exception could be for a departure from formula based assessment (often called Changed of Assessment) under reason 8 (financial resources/capacity to earn)). Rather, it is what appears on your tax return. Here's the relevant section from the CSA Guide:

The CS Guide - 2.4.4: Child support income  - Total Net Investment Loss said
Total net investment loss

The description of this income component at section 43(1)(d) refers to the Income Tax Assessment Act 1997, which includes this definition of the term at section 995.1 of that Act:

    'total net investment loss' of an individual for an income year means the sum of:

    the amount (if any) by which the individual's deductions for the income year that are attributable to financial investments exceed the individual's gross income for that year from those investments, and
    the amount (if any) by which the individual's deductions for the income year that are attributable to rental property exceed the individual's gross income for that year from rental property.

Financial investments include shares, managed investment schemes, forestry managed investment schemes, and a right or option in respect of any such investment.

In calculating the loss amount relevant to financial investments the gross income and related deductions are considered to determine if there is a net financial investment loss. A similar exercise is undertaken to identify if there is a net rental property loss. Both loss amounts (if any) are then added together to identify the total net investment loss.

    Example

    If M has an income from wages of $10,000 and a net rental property loss of $15,000, M's taxable income is $0. The net rental property loss of $15,000 is then added back to M's taxable income of $0 to arrive at an adjusted taxable income of $15,000 for child support purposes.


    Note: Prior to the 2009/2010 financial year only net losses incurred in relation to rental property investments were included when calculating an ATI.

If your question is not about how they work out the Net Investment Loss but in regard to how it affects the taxable income, it is simply added to the taxable income as per:-

The Child Supprt Guide - 2.4.4: Child support income - Adjusted taxable income said
Adjusted taxable income

A parent's adjusted taxable income (ATI) is the total of the following components (section 43(1)):

    taxable income for the last relevant year of income (including overseas income if the parent is a resident of a reciprocating jurisdiction)
    reportable fringe benefits total for that year of income
    target foreign income for that year of income
    the parent's total net investment loss for that year of income
    the total of the specified tax free pensions or benefits received in that year of income, and
    the parent's reportable superannuation contributions.

If an application for post separation income to be excluded from a parent's adjusted taxable income has been accepted then the parent's adjusted taxable income will be the amount determined by the Registrar (section 43(2)).

If you are looking for the legislation then Section 43 in the Child Support Assessment Act is the relevant section:

The Child Support Assessment Act 1989 - Section 43 said
43  Working out parents adjusted taxable income

             (1)  Subject to this Part, a parents adjusted taxable income for a child for a day in a child support period is the total of the following components:

                     (a)  the parents taxable income for the last relevant year of income in relation to the child support period;

                     (b)  the parents reportable fringe benefits total for that year of income;

                     (c)  the parents target foreign income for that year of income;

                     (d)  the parents total net investment loss (within the meaning of the Income Tax Assessment Act 1997) for that year of income;

                     (e)  the total of the tax free pensions or benefits received by that parent in that year of income;

                      (f)  the parents reportable superannuation contributions (within the meaning of the Income Tax Assessment Act 1997) for that year of income.

Note 1:       Other provisions that relate to a persons adjusted taxable income are section 34A and Subdivisions B and C of Division 7.

Note 2:       The components of the definition of adjusted taxable income are defined in section 5.

             (2)  If the Registrar amends an assessment under section 44, then for the purposes of the assessment, the persons adjusted taxable income for a child to whom the assessment relates, for a day in the child support period, is the amount determined by the Registrar.
Patronus, I don't think I fully understand your question.

The net loss from the investment property is added back to your income, as per your example, the taxable income for child support purposes is increased by the $20k so as child support is calculated on the $70k. In relation to rental properties its very easy for them to work this out as the net loss of the property is reported as a single line item separately in your tax return so they pick it up immediately and add it back.
Thanks for the replies.

I was trying to get an understanding of how the formula works. This is not my forte…yet.

On the face of it, it was a simple case of a net loss being added to the taxable income.(which I found unusual that a loss was calculated as an income, but it seems to be the the way, c'est la vie)
By the way has this ever been challenged and what was the result?

What confused me was the way the CSA had explained it because they seemed to say that the net losses had to be more than the net taxable income and then the example in 2.4.4 seemed to reiterate this.
Section 43 seems more straight forward but then again I have found potential exceptions but nothing as a precedent. I would imagine for something like this there must be a leading case. If you could point me in that direction that would be great!

"When there is no enemy within, the enemies outside can not hurt you"

Executive of SRL-Resources
My old family home (still owned with the ex) has been rented for the past 6 months while we try to find a buyer & settle other affairs. Even though we split rent & all payments 50/50 I'm concerned I will get an adverse outcome because of the net loss that will come from the house which will increase my CS.

Does the investment loss get automatically added back in by CSA (does the ATO advise them of it?) or does it come out if a COA is done?

"I know that you believe you understand what you think I said, but I'm not sure you realise that what you heard is not what I meant."

 
You could always argue the depreciation that is added back and if there is any bank interest deductions.
Do your own calculations. Gross rental income less expenses, equals Income. Add that onto your personal tax income for a total taxable income to pay child support on.
Wilfred - The ATO advises the CSA of the taxable income and the net rental loss. the CSA then automatically add the loss back to derive a new adjusted income. In relation to your rental property if you only received half the income and paid for half the expenses and the property appears to be jointly held then you should only include in your tax return half of the net loss (half of the income less half the expenses).

Patronus - Notwithstanding what the legislation says, the basic principle behind the adding back of the net loss is to provide a better reflection of the income earned in that specific year. If this provision was not in place then a payer could purchase multiple negatively geared properties and significantly reduce their CSA income. The hold the properties until after their child turned 18 and sell the properties and then never pay child support on that income.

The issue I have with this is that if you sell the property prior to your child turning 18 you also get assessed o the capital Gains. As a general principle an invested often accepts an investment of a negatively geared property in the hope of that property value increasing over time so as when the sell the property they make a capital gain that is greater than the losses each year (the timing of the taxation has a significant impact in these amounts). I believe it is unfair for 100% of both the capital gain and the net losses added back to be assessed for child support. I believe this is double dipping.
Patronus - You are correct in how the C$A works out the ATI.

I would like to mention that if you have a rental property that was negative geared with a 2k net loss each year, and another rental property that was positive geared with a 2k net gain each year, then C$A would be none the wiser as there would be no net gain or loss to declare.
Thank you Fairgo. Your advice will be put to good use this financial year.

In terms of the original question and the example given, I see it slightly differently in terms of the figures but due only to the inclusion of tax.

Based on gross of 50K and a net rental loss of 20K, added back that would make 70K gross. You won't be assessed on that entire amount though because tax hasn't been taken into consideration. In practice: 50K income - 20K rental loss - income tax, then add the 20K loss back. The figure would be significantly less than 70K before the minefield of investment loss write-offs are tendered to the vultures at CSA. Regardless of investment losses and negative gearing, bare bones income tax would reduce the figure measurably.

I'll also state the bleedingly obvious at this point; the Guide and the acts are still far too complicated. I asked CSA about this very subject some time ago and just like Patronus I was left bewildered by the response and ended up on this site seeking answers.
Sleepy - You do benefit from the 20k deduction say to tune of getting 6k back in tax but then you have to pay more to C$A and collect less family benefits (if you get them). If you are setting up an property investment portfolio in your name and you have a big family, it would make sense to utilise the above investment strategy in order to minimises C$A and maximise Family benefits.
Fairgo - you are correct the CSA are only interested in the overall net investment loss for all the properties. It not a matter of them being non the wiser it just the way the legislation is applied. I.e. you not hiding anything or being misleading its correct to add up the positive and negative gearing and net position is what is added back.

Sleepy - I don't believe the tax example you provided  is correct. The CSA use your taxable income (income before tax) to calculate the CSA. So if a persons taxable income was $50k (before tax) and they purchased a negatively geared rental property to the tune of $20k. The CSA would use $70k as the income for calculating CSA payments.
I think that the distinction needs to be made between 'gross' and 'adjusted taxable income'. That was one of the sources of my confusion some time ago (I do understand the difference but wasn't sure of how each applied in this context). The gross figure would be 70K, but the ATI would be less due to the adjustments made for tax not including the investment loss in question. There's an example in the guide which explains it briefly:

"If M has an income from wages of $10,000 and a net rental property loss of $15,000, M's taxable income is $0. The net rental property loss of $15,000 is then added back to M's taxable income of $0 to arrive at an adjusted taxable income of $15,000 for child support purposes."

Why CSA used such unrealistic figures including an income of zero is beyond me but the point remains. The adding back of investment losses returns the assessed customer to (effectively) their original gross income rather than more than their gross income. Once tax is taken from that gross figure you then have the ATI which is what CSA use.

PS I'm old and tired. Making sense at this time of night isn't my specialty!
That's right 20% - it's just the way it's worked out which is good to know.

Sleepy - I''d suggest not using the term gross and just use the term taxable income as this is what is used to work out the ATI.

PS: in the example given there would be no tax payable as it is below the tax free threshold.
I think you are looking at this from the wrong angle.

If you are an employee and earn approximately $50,000 that would be your taxable income and with no rental property etc that would become your adjustable taxable income, the figure you pay child support on.

Now assume you have the same job earning $50,000 but have a rental property.  The net rental loss (rent, minus expenses) is $10,000.

Now your taxable income would be only $40,000 ($50,000 - $10,000 loss)  but your adjustable taxable income would be $50,000 ($40,000 + $10,000 net loss).  

Therefore, the adjustable taxable income for child support purposes would be the same whether you have a rental property or not.  Having the property you would get the benefit of a larger tax refund though.



That example provided in the guide is just the most ridiculous set of number I have seen. I had to go and check the guide as thought this may have been like 1 of 20 examples, but no someone has decided this is the best example to provide.

Again however the example is explainable and it has nothing to do with tax. CSA payments are definitely calculated on your taxable income so income tax is completely irrelevant and form no part of the calculation. This is not to say that income tax should not form part of the overall investment decision as it should because the savings in income tax for a certain position may far out weigh the child support. For example in realton to Wilfred's position above, Wilfred may be better off including 100% of the loss in his tax return and not 50% because the extra child support payments may be less than the income tax saving he would receive from including the full deduction.

So to calculate the CSA Adjusted Taxable Income we take the taxpayers taxable income (before tax) and then make some adjustments to in. One of which is the adding back of net investment losses.

The taxpayers taxable income  is their gross income less any deductions they have incurred in earring that income. Note this all happens before tax, so tax is not a deduction. A deduction is an expense that you have incurred in earning your income like travelling expenses, or your accountants cost in preparing your tax return. So if you had gross earnings from wages of say $52k and your accountant charged you $2k for preparing your tax return your taxable income would be $50. Tax and medicare levy etc is then calculated on this amount.

The example provided in the guide, as posted by sleepy above is fascinating as it illustrates the complexities of these calculations.  The reason behind the adding back of investment losses in the legislation is to prevent a payer from deliberately reducing their yearly income and hiding this in a future capital gain, as I mentioned in my earlier post.

In the ridiculous example above M has an income from wages of $10k and an investment loss of $15k so M really has a taxable income of -$5k. In each individual year we cannot report a taxable income of less than zero, however we can carry this loss forward. For many years only Pty Ltd companies could carry forward losses to future income years and individuals would loose these losses. A few years ago the ATO changed this to allow for individual taxpayers to carry forward these losses and offset them against future income. So in the example above Mr M would carry forward the loss to next year. However once it is carried forward it looses its identity as a net investment loss, so the CSA formula adds it completely back to effectively assess the payer at an income of $15 this year when really his wages were only $10k. While this on the surface appears to be wrong and ridiculous, it is accounted for in the next CSA year when the taxpayer uses the carried forward losses to reduce his taxable income. So for example if Mr M decided to sell the investment property and next year he had wages again of $10k and no investment loss. His taxable income would be reduced by the $5k carried forward and the CSA would calculate his payments based on the $5k.

So effectively a payer is paying higher CSA payments than his actual wages in the base year and then his is accounted for in the next income year when he will pay lower payments than his wages. You would need to watch if this occurred in the final year of CSA payments as you could pay child support on the extra $5k and not have the benefit of it being reduce in the next year.
So the bottom line is that you CS on an investment loss instead of paying on physical income.

1. The flow of cash or cash-equivalents received from work (wage or salary), capital (interest or profit), or land (rent).

2. Accounting: (1) An excess of revenue over expenses for an accounting period. Also called earnings or gross profit. (2) An amount by which total assets increase in an accounting period.

3. Economics: Consumption that, at the end of a period, will leave an individual with the same amount of goods (and the expectations of future goods) as at the beginning of that period. Therefore, income means the maximum amount an individual can spend during a period without being any worse off. Income (and not the GDP) is the engine that drives an economy because only it can create demand.

4. Law: Money or other forms of payment (received periodically or regularly) from commerce, employment, endowment, investment, royalties, etc.
The reason behind the add backs is that if you can afford to rack up investment losses, then you have more ability to support your children than the person who does not have investments, and therefore you should not be as dependent on welfare.
This seems to be rather a philosophically egalitarian premise but it does not seem to be based on rational economics and more over the legislation appears to be founded in this logic.


IE; the ATO calculates that the ATI is $50K, based on their legislation, however the CSA calculates $70K based on their legislation(seemingly due to an assumption of it will be OK because they must be doing alright). It is this disparity that I am struggling to get my head around. I am making no comment on wether I agree with this assumption or not, it is more with an analytical view of this legislation. It just seems to be inserted into sect 43 without foundation or explanation and is contrary to all other corporate and financial legislation that I am aware of.  As such I would have thought this must have been challenged by some highflyer with a selection of investments but I have not found any cases on point as yet. The CSA have not been able to provide me with a leading case to support their argument.


I will see what comes up. If anyone knows of any cases, please let me know.

"When there is no enemy within, the enemies outside can not hurt you"

Executive of SRL-Resources
Similar method is used to calculate eligibility for Family benefits. Also for every dollar received in child support, the payee loses 50c in family benefits if they receive more that the base rate. This is how the Gov pays for the C$A.

Happy father's day to all - hope you are able to spend the day with your children.

If not, don't spend the day on here. Go and help someone in need.
Twentypercent said
The issue I have with this is that if you sell the property prior to your child turning 18 you also get assessed o the capital Gains. As a general principle an invested often accepts an investment of a negatively geared property in the hope of that property value increasing over time so as when the sell the property they make a capital gain that is greater than the losses each year (the timing of the taxation has a significant impact in these amounts). I believe it is unfair for 100% of both the capital gain and the net losses added back to be assessed for child support. I believe this is double dipping.
  20%, this is an issue I'm facing with an upcoming Property settlement.
I have an investment property whereby, there will be approx $100K Capital Gain, when sold.
That Capital Gain gets added onto my ATI (as it was solely in my name for Tax purposes), and C$A will increase my annual income by $100K.

The proceeds of the sale will be distributed to the Ex, so I won't see it.

Speaking to C$A, it appears there is NO way to head this off, the "system" will pick up the numbers, create arrears, penalties etc
THEN I have to try to claw it back as a one-off using Reason 8.

BUT, my question is, she walks away with $400K cash, and that doesn't get seen as a financial resource??  WTF?
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