CHILD MAINTENANCE TRUSTS
The Australian Tax legislation provides that a Child Support Trust can be
established following a family breakdown.
A family breakdown is defined as including legal obligations arising not only
from the breakdown of live-in relationships but also where parentage has
occurred outside of such a relationship.
Such a Trust is set up to provide support for a child (or children) where
there is an obligation to provide support for the child and income that is
distributed to the child (or physically to the Resident parent) is taken to
satisfy that obligation.
Such a Trust allows Child Support payments to be made in a tax-effective
The general tax-free threshold for children is $416.00, after which every
additional non-employment income dollar (such as Trust distributions) is taxed
at the top marginal rate of tax of 48.5%.
A Child Maintenance Trust which complies with Section 102AG of the Tax Act
provides for “excepted trust income” to the minor which will only attract the
normal adult tax rates, including the larger tax-free threshold (currently
$6,000.00) as well as lower marginal tax rates. By way of example, for a
maintenance paying parent who is on the top marginal tax rate to effect a Child
Support payment of $15,000.00 per year without a Child Maintenance Trust would
require approximately $29,000.00 (gross) per year, whereas with a Child
Maintenance Trust would require approximately $17,000.00 (gross) per year, an
annual saving of approximately $12,000.00.
Other benefits of such a Trust include:
- segregating cash or assets into a Trust separate from the parents, to
provide ongoing support for the children;
- Trust assets are protected from external creditors;
- Income Tax saved by the Trust can accumulate within the Trust until the
child reaches “vesting age”;
- The funds settled on the Trust can be borrowed, provided the capital is
ultimately repaid and will benefit the children;
- The establishment of such a Trust requires the consent of both parents. It
is most advantageous if the contributing parent is receiving a taxable income
of at least $80,000.00 per year and has significant other assets;
- Where the children have a number of years of support prior to reaching 18
- Where the parents are comfortable leaving some assets to the children at
the vesting date;
- The initial property settled has a value of at least $200,000.00.
The Tax Office requires that the income must derive from the investment of
property transferred beneficially to the child, i.e. the child will acquire it
when the Trust ends. Accordingly, the parents who initially contributed the
asset to the Trust cannot allow the asset to come back to them at a later date.
Child Support Trusts are not for everyone, but when used correctly can have
significant financial benefits. Consideration of such a Trust requires careful
financial, taxation and legal advice.
Last modified on Aug 16, 2004 10:50:46 AM by Michael Lynch Family Lawyers.
This Information Outline is provided courtesy of Michael Lynch Family Lawyers
who are accredited specialists in this area of law. They are located at Level
17, 255 Adelaide Street, Brisbane, QLD 4000 or call them on (07) 3221-4300 if
you would like more information on this legal topic, or you wish to obtain
formal advice regarding your situation.
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