Attribution of tax factors

Under the current joint taxation of spouses, the exact attribution of tax factors did not play a decisive role. Rather, income and assets were pooled in many cases. This will change fundamentally under the system of individual taxation:

• Income is generally attributed based on civil law circumstances. Expenses that serve to generate income can be claimed by the individual who earned the respective income, regardless of who effectively bears the expenses.
• Movable and immovable private assets and the associated expenses (e.g., maintenance costs, asset management costs) are attributed according to ownership structure. The attribution of debts and debt interest is based on the underlying debt contract.
• Contributions to pillars 1, 2, and 3a, insurance deductions, illness, accident and disability costs, as well as further education costs are attributed to the insured or affected individual.
• Child-related deductions are generally allocated equally among the parents. In certain circumstances, one of the spouses may claim the full deduction. The child deduction for direct federal tax will increase from CHF 6,800 to CHF 12,000.

What may sound simple at first glance can lead to challenging questions in practice:
For example, how should a real estate property be reported in the tax return if it was inherited by one spouse, but the other financed the renovation? Or what about a taxable art collection where the ownership entitlement remains unproven? How should a bank account or a securities depot held in the name of both spouses (and/or) be reported in the individual tax return?

Depending on the distribution of income, the attribution of the tax factors can lead to individual distortions (e.g., ineffectiveness of deductions). Under the new system of individual taxation, these may be mitigated by legal transactions between the spouses. As before, the tax consequences of legal transactions are subject to tax avoidance. In addition, a holistic view is required when structuring legal transactions under civil law (e.g., matrimonial property law). For example, under the statutory marital regime of participation in acquired property (Errungenschaftsbeteiligung), a gift belongs to the individual property (Eigengut) of the recipient. Consequently, the donating spouse would then have no compensation or participation claims when the matrimonial property regime is dissolved (e.g., in case of a divorce).

Tariff adjustment

Under the individual taxation system, there will only be one standard tariff for direct federal tax. The tax-free amount, above which tax is payable, will be increased from CHF 15,200 to CHF 20,000. In addition, marginal tax rates will be reduced for low incomes and increased for higher incomes. This means that the tax burden will increase compared to today for taxable incomes exceeding an amount of just under CHF 100,000. Another impact is that the threshold at which tariff reaches the maximum tax rate of 11.5% will be slightly reduced in future. It is not yet clear how the cantons will adjust their tariffs and rates.

Impact on lump-sum taxation

Previously, married couples could only claim the right to lump-sum taxation if they both met all legal requirements. This dependence on the other’s situation will no longer apply. Hence, one spouse may claim lump-sum taxation while the other may be subject to ordinary taxation. The assessment bases will now apply separately to each spouse. This for example applies to the minimum assessment base for income (currently CHF 435,000 at federal level) and assets (cantons and municipalities).

Conclusion

The tax implications of the reform are wide-ranging and, in some cases, still unclear. Under the new system, the individual becomes the point of reference for taxation. As a result, capital withdrawals from pillars 2 and 3a will also no longer be aggregated for tax purposes. In addition to the tax assessment bases and rates, tax procedural aspects (e.g., cooperation in assessment procedure, right of inspection, and tax liability) will be amended accordingly.

Depending on the composition of the income and asset structure, you may expect significant and perhaps surprising changes. We closely monitor developments in the tax reform and are happy to advise you on the tax implications the reform may have on your personal situation.

¹ The status of persons in a registered partnership is equivalent to that of married couples.

We, Theodor A.J. Ambauen, Patrick Engstler, Andreas Helbing and Pascal Taddei, closely monitor developments in the tax reform and are happy to advise you on the tax implications the reform may have on your personal situation.