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Couples often plan their finances around buying a home, raising a family, and securing their children’s future through savings and investments. But what happens when a family breaks down?
Issues such as the division of assets, tax implications of property transfers, and assessing whether a child maintenance trust could provide benefits become critically important. While no one enters a marriage or relationship expecting separation and divorce rates have declined to their lowest level since the 1970s, separations still occur. Planning for the possibility can protect your family’s financial well-being.
As accountants, we regularly advise clients on strategies such as establishing child maintenance trusts to ensure that ongoing costs, including education, healthcare, and living expenses, are sustainably funded. However, these types of trusts can only be used in specific circumstances.Â
What is Child Support?
Child support is a payment made by one or both parents to the other, to assist with the cost of looking after the children. It’s paid for children under the age of 18. For this reason, child support is more common than child maintenance.
Who pays child support is dependent on many factors, including:
- If the parents have a sole or shared custody agreement
- If there’s informal or formal arrangements in place between parents
- If an application is lodged for a child support assessment through the Department of Human Services, and more.
It’s important to understand how child support impacts your overall financial planning. While child support itself is not tax-deductible for the payer and not taxable income for the recipient, it can significantly impact cashflow for individuals.
What is Child Maintenance?
Child maintenance, on the other hand, has a similar principle and purpose, but it’s paid for the costs of children over the age of 18. These payments often help cover ongoing costs such as tertiary education, training, or living expenses if the child is still financially dependent.
Similar to child support, child maintenance payments are also not tax-deductible and are considered personal expenses, not business or income-producing expenses.
To avoid placing unnecessary strain on your cash flow or investment strategy, it is essential to plan. In some cases, establishing a child maintenance trust may be a practical option. These trusts can be structured to provide for ongoing expenses while potentially offering tax efficiencies, but they require expert advice from reliable accountants.
What is a Child Maintenance Trust
A child maintenance trust (CMT) is a legal structure established to manage funds for the benefit of a child, often used in family law settlements to provide financial support in a tax-effective way. It is not a payment but a mechanism to hold and distribute funds for a child’s benefit.
The trust is taxed as a trust, but distributions to the child may be taxed at lower rates under minor beneficiary rules, and payments are generally not taxable to the recipient nor deductible to the payer. Commonly used by high-net-worth families, CMTs offer tax advantages by structuring payments to minimise tax liability while ensuring long-term financial support for the child.
An Australian Tax Law Loophole
Commonly, income earned by a minor is taxed at the highest marginal rate once it reaches and exceeds $416 per year. However, by transferring assets to the child or children via a trust, the first $18,000 of this money is income tax free.
The terms and conditions of a child maintenance trust fund:
- The trustee must be a parent of the child/ren who benefit,
- This parent must no longer be married to their spouse, and
- A court order, child support assessment or agreement must be in place that requires the parent to pay the child support/maintenance.
Importance of Accountant’s Advice When Setting a Child Maintenance Trust
Divorce and family relationship breakdowns are often a gruelling time. It can also be expensive, but it doesn’t have to be with the guidance of reliable accountants from Crest Accountants. Setting up a child maintenance trust requires careful planning to ensure it meets both family needs and tax compliance requirements.
Our team is here to structure the trust effectively, provide advice on managing cashflow implications, and maximise any potential tax efficiencies. We can also connect you with other professionals (e.g., financial planners, Family Law solicitors) whose expertise you may also require to ensure your children are taken care of. Contact Crest Accountants today for all your family accounting needs, and more about setting up a trust fund for your children.
Disclaimer: The information contained in this news post is general in nature and is intended to provide a general summary only and should not be relied on as a substitute for professional advice. Whilst the information is considered to be true and correct at the date of publication, changes in circumstances after the time of publication may impact upon the accuracy of the information.
