Sunday, February 19, 2017

How divorce provides disincentives for investment

In Australia, there's a very real imbalance with regards to how finances are dealt with when it comes to divorce and, specifically, child support.

Put simply, the rules are set to cover 95% of the applicable population, with the other 5% expected just to suck it up.

Consider Case A - Unfair to men:

A couple get divorced and they have one child together.  The husband, let's call him Harry, has to pay $300 a week in child support, which is based on the fact that his ex-wife, who we'll call Debbie, earns a decent wage.

Harry's ex-wife Debbie then re-marries and has another child to her new husband and decides to cut back on work or quit altogether.

Child Support Australia then re-calculates Harry's child support payments and INCREASES them to account for the fact that Debbie is no longer earning.

The outcome: Harry must pay MORE money to support his child because of the lifestyle decision his ex-wife made in a new relationship.  What's worse for Harry is that there currently exist no safeguards in place to ensure that the money that he's paying to his ex-wife for child support is even spent on his own child.

Now consider Case B - Unfair to women:

The same couple get divorced, only this time Harry remarries and has a child with his new wife.

Since Child Support Australia calculates amount payable as a portion of your income, the amount Harry is required to pay in child support to his ex-wife is REDUCED because he's now got two children and the total amount he can reasonably be expected to pay is now divided by two.

The outcome: the ex-wife, who may have been relying on that weekly payment to put food on the table and the lights on, is now going to come up short.

Now consider Case C - Disincentive to invest:

Same couple gets divorced, man decides that he's going to buy an investment property, which is negatively geared to the tune of $10k a year.  Since Child Support Australia doesn't allow deductions for negative gearing, the net loss of roughly $200 per week must come out of what money Harry has left after paying child support.

Fast forward 10 years, Harry is still paying child support, only the property is now positively geared and making $200 per week.  Since this income is now considered in calculating child support payments, his payments to his ex-wife go up proportionally, despite him taking the hit for the first 10 years.

Fast forward another 2 years, Harry decides to sell the house and walks away with $200k in capital gains, which is first taxed by the ATO for capital gains tax, then taken apart by Child Support Australia as being profit.

The outcome: any man paying child support is going to pay for an investment property out of what he has left after paying taxes and child support, but once that investment turns a profit in either selling for Capital Gains or in increase in rent, he has his child support adjusted.

The alternative would be to allow deductions of child support due to negative gearing, however this would negatively affect women as some men would load themselves up with multiple properties in the interests of avoiding paying child support.


As stated above, the laws are in place to cover 95% of the population, however as I've shown above in Case C, the current system is a massive disincentive for people paying child support (usually men) to invest in property since they get no concessions in payments early in the investment in the loss-making portion, and get stung at either the profit making, be it positive cash flow or capital gains.

Give that child support can last 18 - 21 years, that's a big chunk of what would otherwise be prime capital building years.

I guess the only suggestions I can make are:

  1. If planning to purchase property, opt for long-term holdings rather than flipping houses profit method.  Making $100k in two years may look good on paper as a side project, but won't look as good when your ex-wife gets a hefty chunk of money from the investment without lifting a finger.
  2. If you already hold properties and would like to sell, hold off on selling until child support payments have stopped.  Simply waiting a couple of years could save you thousands.
  3. Consider investing in lower cost, lower time investments like shares, bonds and ETFs.  You're going to have to pay money to support your child one way or another, but property investment carries a lot more unpaid time cost and capital improvement cost that can only be deducted from your post-child support money.  Simply paying that money as a percentage of dividend yield is a far simpler in the short term.

Please don't take the above post to mean that I'm advocating to minimise support of your children.  I am only pointing out that the whole system is designed for the 95% and that the 5% ends up in circumstances that cost tens of thousands of dollars and are a massive disincentive to bother in the first place.

One of the common complaints I read from ex-husbands is that their respective ex-wives have no accountability for the money: "I pay $500 a week and my wife doesn't work, wears Prada, smokes and drinks".  Perhaps things would be better if there was a mechanism whereby the wives were required to account for the money a bit, but knowing how the media loves to just shoot down any suggestion that women be held accountable for anything is "sexist" and could be open to abuse by former spouses (men) whilst simultaneously defending the decision to allow the current laws brought in under the Gillard government making false accusations against men in divorce cases legal, the chances of any changes in this space are minimal.

It really is one law for men and one law for women.

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