Pursuant to section 51.50 of the Income Tax Assessment Act 1997 (Cth), child support payments made by non-custodial parents to, or for the benefit of a child, will generally speaking need to be funded by after-tax income in order to be tax-free to the recipient. As an alternative to making direct payments of child support, non-custodial parents may wish to consider establishing a child maintenance trust, which may in turn provide significant tax savings depending on the circumstances.
Section 51.50 provides:
“Maintenance payments to a spouse or child
(1) This section sets out the conditions on which a periodic payment, in the nature of maintenance, that:
(a) is made by an individual (the maintenance payer ); or
(b) is attributable to a payment made by an individual (also the maintenance payer );
is exempt from income tax under item 5.1 of the table in section 51-30.
(2) The maintenance payment is exempt from income tax only if it is made:
(a) to an individual who is or has been the maintenance payer’s * spouse; or
(b) to or for the benefit of an individual who is or has been:
(i) a * child of the maintenance payer; or
(ii) a child who is or has been a child of an individual who is or has been a * spouse of the maintenance payer.
(3) The maintenance payment is not exempt if, in order to make it or a payment to which it is attributable, the maintenance payer:
(a) divested any income-producing assets; or
(b) diverted * ordinary income or * statutory income upon which the maintenance payer would otherwise have been liable to income tax.”
Child maintenance trusts are a valid means of satisfying child maintenance payments in a property settlement or divorce. This is accomplished by setting up income-producing property into a trust established to provide child maintenance payments and satisfying a number of conditions, set out in section
The reasons why such trusts are established is that they are exceptionally tax effective, as well as being a certain means of providing child maintenance payments. The tax advantage is primary one of income splitting. The income of such a trust is taxed to the infant beneficiary at normal resident tax rates. In most trust structures, infant beneficiaries would be subject to penalty rates of tax on distributions received in excess of $416 (2018-2019 tax rates).
The savings here are potentially immense, particularly if the tax payer settling the asset into the trust is a top tax rate payer. An infant beneficiary can receive $21,600 from a maintenance trust before paying tax. A tax payer in the top marginal rate of tax would have to apply $40,790 of their pre-tax income to make the same $21,600 payment.
For more information, contact Rockliff Snelgrove Lawyers on (02) 9299 4912.