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Here are 10 child maintenance trust questions that might help you.
Child Maintenance Trust Questions
Child maintenance trusts – we already spoke about them in ep 309 but in this episode Patrick Huang of Coleman Greig Lawyers in Sydney will go through 10 questions you sent in.
Here is what we learned but please listen in as Patrick explains all this much better than we ever could.
To listen while you drive, walk or work, just access the episode through a free podcast app on your mobile phone.
Child Maintenance Trust Questions
A child maintenance trust is a way to achieve excepted income under Div 6AA ITAA1936.
Without a trust, you would have to earn – at the top marginal tax rate – about $38k to pay $20k in child support. But within a child maintenance trust you only need to earn $20k to pay $20 in child support, assuming that the child has no other income and hence no tax to pay.
1 – Type of Trust
A child maintenance trust is commonly not a discretionary trust, but a fixed trust since the trustee usually has no discretion with respect to the distribution of income – it all goes to the child/children.
While most fixed trusts come in the form of a unit trust, a child maintenance trust is usually not a unit trust.
2 – Control of the Trust
The trustee / trustee director is usually the paying parent. After all, it is their child support obligations that the trust needs to cover.
However, in theory, anybody can be a trustee. So the parents might decide to be joint trustees or add a neutral third-party to the mix.
If the receiving parent is not a trustee, then they have no control over the trust. But they have the settlement agreement plus family court to ensure they receive the payments as agreed.
3 – Vesting Date
The vesting date can be any date between the child’s 18th birthday and the 80 years statute of limitations.
However, once a child turns 18, they can usually call upon the trust and demand that the trust assets are transferred to them – no matter what the vesting date is.
It is usually best to set the vesting date further into the future well beyond the 18th birthday, since the child might not be ready to receive the fund assets right on his birthday.
4 – Assessment
The trust needs to distribute all income to avoid the trustee being assessed at normal rates, ie their marginal tax rate. When distributed, the trust income becomes assessable income in the children’s hands and is taxed as normal adult tax rates.
5 – Top Up
If the trust doesn’t earn enough income, the paying parent usually has to pay a top up.
To avoid an overpayment in one year and a top-up in another year to meet minimum child support obligations, use a ‘tally sheet’. This is an agreed side calculation that offsets over-payments with top-ups.
So let’s say the child support is $50k a year, but in 2019 and 2020 the trust generated $60k and $70k but in 2021 only $20k a year. With the agreed ‘tally sheet’, all income would be distributed as earned, but the tally sheet would then pick up a credit for the overpayment in 2019 and 2020 of $10k and $20k respectively and then use those credits to cover the shortfall in 2021. So in this example, there would be no top-up payment in 2021, even though the trust only paid $20k.
6 – Death of a Child
If the beneficiary of a child maintenance trust dies, their share goes into their estate. If there is no will, the intestacy laws of the particular state kick in. In NSW the estate of a child without a spouse or descendants goes to the parents in equal shares.
So if possible include a will for each child in the divorce settlement, so that the fund assets can go back to the paying parent.
7 – Capital Contribution
Income only qualifies as excepted income, if it comes from assets that are put into the child maintenance trust as part of the divorce property settlement.
So you can’t just funnel income through the trust by having a discretionary trust distribute income to the CMT. To what extent you might be able put assets into the CMT where you can somehow control the income these assets generate (e.g. shares in a bucket company) is worth exploring if this is something you want to pursue.
8 – Loan
The child maintenance trust can lend fund assets back to the paying parent or their associates at commercial interest rates. Just make sure the loan is at arm’s length and complies with the deed.
So let’s say you pay $1m into the CMT but need the funds to run your trading company. In that case the trust can lend the $1m back to your company at commercial interest rates. The company would receive a tax deduction. And the children would pay zero or very little tax at adult tax rates on the interest income.
9 – Failure to Pay
If you don’t pay child support without a CMT, you have family law to contend with.
But if you don’t pass the CMT income to the children but hold it back – for example, because your agreed access to your children is denied – then you don’t just have family law to contend with, but also trust and tax law. You might not follow your obligations as trustee of the trust to act in the best interest of beneficiaries. And the undistributed trust income will be assessed to you as trustee at your marginal tax rates.
So not paying child support is an issue when it is just you. But you face a lot more issues when it is the CMT which fails to pay.
10 – Tax
One important question we forgot to ask during the interview is how the child’s tax payments are treated. Let’s say the child maintenance trust distributes $180k of excepted income to the child each year. Who pays the $51,667 in tax?
The answer is that the child pays the tax since it is their assessable income. However, the child support agreement might require the paying parent to compensate the child for this tax liability.
So this is a short summary of what we discussed in this episode. Please listen in as Patrick explains all this much better than we ever could. We just gave you a rough summary of our understanding.
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Disclaimer: Tax Talks does not provide financial or tax advice. All information on Tax Talks is of a general nature only and might no longer be up to date or correct. You should seek professional accredited tax and financial advice when considering whether the information is suitable to your or your client’s circumstances.
Last Updated on 23 October 2023
Tax Talks spoke to Patrick Huang - Senior Associate at Coleman Greig Lawyers - for more details.
