Date: 26th April 2021
Married couples have for several years submitted one income tax return covering the declarations for both individuals. Traditionally, married couples prepared an annual joint or separate income tax computation, and declared their income in one income tax return which is issued in the name of the responsible spouse.
However, the Income Tax Act was amended and introduced a new tax option to married couples with effect from 2020.
Situation before the 2020 changes
Prior to the 2020 changes, married couples, including civil partners, were able to opt for a separate computation. This was usually preferable in instances whereby both individuals were earning employment, trading, or pension income. Any income that was not employment income (excluding directors’ fees), trading income or pension income, in other words, ‘earned’ income, was automatically taxable under the higher income earning spouse. This would in practice result in this other income being potentially taxed at higher tax rates. Moreover, any tax credits were received under the responsible spouse’s name by default, even if they would have pertained to the other spouse.
What are the changes?
As from calendar year 2020, married couples, including civil partners, that live together have the option to receive a separate income tax return under their name, being referred to as ‘separate return election’, as long as the married couple are:
- Employed (excluding directors’ fees), deriving trading income, or pension income; or
- Have agreed to a separation of assets upon marriage
The separate return election means that the income of each spouse will be charged to tax under their own name separately from the income of the other spouse. This includes any other income, whereby such other income may now be brought to charge in the name of the spouse actually receiving said income as opposed to it being brought to charge in the name of the spouse with the higher income. Likewise, any tax credits or deductions shall be allocated to the spouse actually deriving or incurring such credit or deduction respectively. With respect to deductions, the law makes reference to the name included on the receipt as an indication of the recipient. If the receipt is issued in the name of both spouses, the deduction is to be split equally between the spouses. The same applies for any unabsorbed tax losses or capital allowances, and any unabsorbed tax credits.
Married couples that satisfy the above-mentioned conditions may request a separate tax return from the Commissioner for Revenue. The election will come into effect on 1 January of the year immediately following that in which the election is made and shall continue to have effect until such election is revoked. Spouses who do not opt for a separate return can still apply to receive a tax refund directly in their bank account rather than receiving a cheque under the name of the responsible spouse.
As stated in the paragraph above, the married couple may revoke the separate return election by signing a notice and sending it to the Commissioner for Revenue. The election will cease to have effect as from the year of assessment starting from 1 January of the year immediately following the notice of revocation and will be available for election again after 5 years.
Under any option, the tax return together with a self-assessment must be submitted by the end of June of the year following the calendar year. Penalties will be incurred unless the tax return is submitted by the said deadline. It is up to the Commissioner for Revenue to decide whether the individuals are required to file a tax return or not. If the new election is selected, each spouse will be responsible to submit their own returns based on their Income in accordance with the Income Tax Act.
Apart from allowing for a fairer calculation of the tax charge for married individuals, one may also conclude that this new law promotes equality between the spouses, an aspect which was the previous system did not take into consideration. As the National Commission for the Promotion of Equality argued, in order for this reform to be as effective as possible, the separate tax return should be automatic rather than an option ‘since equal treatment should be the default and applicable to all’.
For further information and assistance, please contact us on:
Stephanie Aquilina Galea – Tax Supervisor
+356 25 990 411
Sarah Schembri – Tax Accounts Assistant
+356 25 990 693