<< Back to Blog

Child Maintenance Trusts – a different kind of support

Child maintenance trusts

Posted on

According to the National Centre for Social and Economic Modelling (NATSEM), the cost of raising two children is estimated at $812,000. For those in the 45% tax bracket, every $25,000 in child support costs nearly $50,000.

Just as alarmingly, children receiving payments of ‘unearned’ income, such as support payments can attract tax rates as high as 66%.

When a Child Maintenance Trust (CMT) is established, investment assets placed into the trust generate income toward meeting child maintenance obligations. CMT income is taxed in the child’s hands at adult rates meaning that children receiving benefits from CMTs can claim the tax-free threshold, currently $18,200.

Before a CMT can be set up certain conditions apply including:

  • a marriage breakdown occurring,
  • both parents consenting to the trust terms,
  • the contributing parent must earn in excess of the income tax threshold.

Importantly, trust assets come under the child’s control at a date pre-determined by you, for example, when the child turns 18.

A clear advantage is that CMTs protect assets so should you become bankrupt or lose your job you can continue to meet your child support obligations.

Case study – Emily

When Emily was 13 her parents divorced. Emily lived mainly with her mother and her father’s child maintenance obligation was set at $1,000 per quarter. After seeking financial advice, Emily’s father considered a Child Maintenance Trust. A comparison of Emily’s financial situation was used to determine whether a CMT was appropriate.

If Emily’s father invested a lump sum of $30,000 at 4%pa, regular quarterly drawdowns of $1,000 could be made comprising $300 income and a return of capital (return of capital is tax free).

Taxed at adult rates, the CMT income would fall below the tax-free annual threshold of $18,200 therefore no tax would be payable.

Emily’s father set up a CMT that would vest in her name when she turned 18. If Emily got a part-time job while she received these maintenance payments, her wages would be added to the payments and provided the total did not exceed the annual threshold no tax would be payable.

Outside of a CMT, Emily’s support payments would pay tax at minor rates. As her payments would exceed $1,307 pa, they would be taxed at the flat rate of 45% ($1,350). Wages attract adult rates but would fall beneath the tax-free threshold.

This has been a very brief introduction. It’s worth talking to your financial adviser about how CMTs might fit into your overall financial strategy as they are not for everyone.

Note: this case study does not consider variations in child support payments or inflation.

<< Back to Blog

Contact Us

p. +61 7 3832 5777
f. +61 7 3832 5778
e. admin@dolfinwise.com.au

The Right Start
Bronnie Abraham recently featured in the Financial Planning Magazine as the latest winner of the Gwen Fletcher Memorial Award for being the highest achiever in the CFP Certification Unit.
Continue reading...

Bronnie Abraham wins Gwen Fletcher Memorial Award
Dolfinwise financial planner Bronnie Abraham is the winner of the latest FPA Gwen Fletcher Memorial Award
Continue reading...

Planning on Investing? Have you considered a Super option?
Dolfinwise adviser Jason Bragger has been selected as the Superannuation Expert in the Financial Planning Association's "Financial Planning Week". Read Jason's Super & Investment Blog here.
Continue reading...

Dolfinwise announce merger
Dolfinwise is proud to announce the merge of Cameron Renshaw & Associates with Dolfinwise commencing 1st June 2013. Financial adviser Howard Querido will join the merged firm
Continue reading...

See More
Financial Planner Dolfinwise © 2017 | Legal Notes | Useful Sites | Web Design Brisbane by TwoCents Group Intelligent Advice