One Nation has announced a new policy that would give ‘wage-earning couples with families a choice to file tax returns separately or together’.

This is ‘income splitting’, and it would create a more fair and equitable tax system. As detailed later, lumping household income together is also aligned with the government’s very own actions.

Income splitting is a tax strategy where a higher-income individual is able to split their income with a lower-income spouse. With Australia’s tiered income tax system, where increased earnings progressively move you into higher tax brackets, this would be beneficial for couples. It would ensure the lower tax brackets, including the $18,200 tax-free bracket, is utilised by both individuals rather than just one of them.

It is arguable whether children should be the deciding factor on whether couples are allowed to income split. After all, virtually all private businesses, and most investment trusts, utilise income splitting to some extent, and don’t need to meet the ‘having a child’ requirement. They simply distribute profit and earnings to the lower-income spouse, thereby inflating one income whilst reducing the other.

But as can be seen below, it is when a partner is not working (scenario 3), and likely looking after children, that income splitting would be most beneficial. An extra $10,883 income tax is paid where an individual earns $150,000 and their spouse nothing, compared with scenario 1 where one person is on $100,000 and the other $50,000.

The current tax system is structured to penalise couples who choose to have someone stay home to raise a child. Why should a household with one income of $150,000 pay $10,883 more in income tax than a different household which also earns $150,000?

Conspiracy theorists who believe the government works against the family unit, and want to raise children from the cradle to the grave, may have a point. Whilst the government is announcing taxpayer funded childcare for everyone, they punitively tax households which want to do their own childcare. In scenario 2, where there is a significant difference in income between partners, the household is taxed $8,858 less than the couple with a stay at home parent. How is that equitable?

And how does it help address Australia’s concerning decline in birth rates? We know that ‘personal financial concerns (e.g. cost of raising children, job security, and cost of housing) remain the most important factors when people consider having children’ because the Australian government’s Centre for Population tells us. It is time for the government to address the growing issue of financial insecurity which young couples are experiencing, and acknowledge that the income tax structure is a significant cause of this problem.

Instead, we have a government, regardless of Liberal or Labor, which hand-out ever more money on various thought bubbles, and thereby place greater strain on the taxpayers. This in turn exacerbates the unfairness within our income tax system.

As a financial planner, I frequently deal with couples where one partner has decided to retire, and the other will continue working. This can be due to age, health or lifestyle reasons. In these instances, the retiree is often not able to receive any aged pension, even if of pension age, because their partner is still producing an income. The government has no qualms in lumping household income together in this instance, or when calculating eligibility for the Commonwealth Seniors Health Card.

Likewise, as any parent who has received family tax benefits, childcare subsidies, or rental assistance knows, combined income is used when determining pretty much all Centrelink payments. If the government is happy to look at household incomes when handing out our money, they should do the same when taking it.

In various formats, income splitting already occurs in the United States, Germany, Portugal, and France. Income splitting has a lot of merit and should be adopted, or at least seriously considered, by other Australian political parties. It is a fairer way to tax households, it promotes and support families, and it will help create the financial security people seek when deciding to have a baby.

This content does not constitute and is not intended to be financial or other advice and is not to be relied upon as the basis for any investment or other decision.