Raising children is an expensive business and more so if the parents are separated.
Most maintenance (child support) is paid with after tax dollars. The highest marginal rate is 46.5%. If you are on that rate, then you need to earn almost $40,000 to have $20,000 left to pay the child support.
A Child Maintenance Trust allows your children to pay the tax but generally at a lower tax rate – even a tax rate of zero. This is tax-effective income splitting.
With such a trust, you hold assets for your children’s benefit. In effect, you put “capital” into the trust (e.g. machinery, livestock or more rarely shares and property – anything that makes an income). Some or all of the income created from the trust can be paid to your children (or their guardian). This covers your maintenance obligation. The children then pay tax at the generous adult tax rate threshold. E.g. for each child the first $6,000 is tax-free (as it is for any Australian adult).
Usually, a child under 18 years of age pays tax at a rate of 66% for passive income from a trust. This is not the case for a Child Maintenance Trust. Under the Income Tax Assessment Act 1936 the trust income is “exempted trust income”. A properly set up Child Maintenance Trust gives the child the more generous adult tax rate threshold.
Sadly, your children eventually get their hands on the capital. This can be when they turn 18, 21 or even 80 years from the date that you set the trust up. This date is called the “vesting age”. This is why small business owners are the most prevalent users of these Child Maintenance Trusts.
The trust is only available for a “family breakdown”. You also need a legal obligation to pay maintenance for your children.
A “family breakdown” is the end of a domestic relationship – either a marriage or defacto relationship. There is no requirement to be actually divorced. You don’t have to have been married or in a defacto relationship. A one-night fling will do it.
Both parents must agree to the trust being set up and used. The other parent may not care about saving you tax. In fact, they are often happiest when you are suffering the most. However, the Platinum members can read why you can virtually always get the other parent to agree.
Whether a Child Maintenance Trust is for you is a question for your accountant and adviser to give advice on.
Reproduced with the permission of Law Central: www.lawcentral.com.au