THE AVERAGE CHILD COSTS $458 A WEEK TO RAISE.
That is a substantial cost.
Raising a child is a substantial public good.
Over the years we have been able to claim tax deductions for plantation forests, wineries and the Australian movie industry, and in return received margin calls, undrinkable clean skins and movies nobody can stand to see. Why then can we not pay child support pre-tax?
WELL, WE CAN. THE WAY TO DO IT IS A CHILD MAINTENANCE TRUST.
A child maintenance trust (CMT) can provide a tax effective means of paying child support and other expenses related to the education and maintenance of a child.
Income derived by a child beneficiary from an income producing asset (such as property) that has been invested for the benefit of that minor is treated as excepted trust income under the Income Tax Assessment Act.
This means that the income is assessable to the trustee and is taxed at marginal adult tax rates.
HOW MUCH OF A SAVING IS THIS?
At the highest marginal rate of tax, you must earn $44,444 to net $20,000, which can then be paid towards child support. $24,444 of that $44,444 would be paid in tax and superannuation.
How much income does a CMT need to earn to pay $20,000 to a beneficiary by way of child support?
That is a tax saving of $24,102 in order to pay $20,000 towards child support, if you are on the highest marginal rate of tax.
ARE THERE OTHER BENEFITS?
There are too many benefits to list in a short article like this one, but I have chosen my two favorites:
- Asset protection - transfer assets that will be distributed to a beneficiary later - in any event - but take steps that might protect the assets now.
- If the trust assets involve shares in a family business, the beneficiary could begin acquiring an interest in that business in the form of these shares from an early age. This results in an elegant succession planning outcome.
SO WHAT IS THE CATCH?
There are stringent compliance requirements, which your accountant will need to assist you with. In particular, the trust deed of the CMT must be drafted in line with the relevant legislation. Also:
- the income producing asset that will sit in the trust must be transferred due to a “family breakdown” or separation;
- an order of the court or an assessment of child support is made as a result of that separation that says that one of the parties to that separation has an obligation to maintain a child;
- that child is the beneficiary of the CMT; and
- the asset must be acquired by the beneficiary when the trust ends; and
- the income derived from the trust must be derived at arm’s length.
There are a number of other technical requirements in which advice should be sort.
You should also consider the size of the assets that will need to be invested in order to derive sufficient income for it to be worth setting up a child maintenance trust.
THIS IS STARTING TO SOUND A BIT COMPLEX
CMT’s are a bit complex, which is why you need the best advice. The size of the savings under a CMT can be enormous, and well worth exploring.