PAYMENT OF CHILD SUPPORT THROUGH A CHILD MAINTENANCE TRUST

If you are required to pay child support as a result of a family breakdown then it may be possible for you to transfer income producing property to a Child Maintenance Trust and pay child support through the trust. If this is done correctly then the income from the Trust can be paid to the children to satisfy your child support obligations. Those payments could be classified as excepted trust income and be received as income in the hands of the children as if they were adults for taxation purposes. Usually child support payments are an after tax expense and you receive no deductibility whatsoever for them. Normally payments made to children through a trust are heavily taxed under Division 6AA of the Tax Act unless it is excepted trust income. Making the payments through a Child Maintenance Trust as a result of a family breakdown can satisfy the requirements of the legislation. It has been commonly thought that the value of the property being transferred to a Child Maintenance Trust needs to correlate proportionally to the amount of income generated by the property being transferred. However, the legislation does not require this. There are a number of requirements which need to be satisfied but there is no reason why property of insubstantial value which generates healthy income sufficient to satisfy child support payments should not satisfy the legislation requirements. However, the transfer of the property must be a dealing at arm’s length. If a taxpayer is required to maintain his children as a result of a family breakdown and receives an income substantially in excess of the top marginal tax rate then child support obligations together with other expenses incurred whilst exercising contact with the children could be an expense of as much as $25,000.00 per annum. A taxpayer would normally be required to earn almost double that amount ($50,000.00) before payment of tax to pay the child support obligations and other expenses involved with exercising contact with the children such as holidaying expenses. In the correct circumstances and with the correct advice it may be possible for the before tax income of $50,000.00 required to maintain 2 children to be reduced down to about $35,000.00. This could be a considerable saving over time if a taxpayer is required to maintain the children for say 12 years. Legislation requirements are reasonably complex but the Taxation Act does permit perfectly legitimate and considerable concessions if the family law settlement and child support obligations are structured correctly. If you would like to know more about this please call Simon Della Marta. Simon Della Marta simondm@gells.com.au

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