Monthly Tax Tip – Unlocking the advantages of a Child Maintenance Trust
Parents are financially responsible for the upbringing of their children and, importantly, this responsibility is not impacted by the separation or divorce of the parents. This duty is also not influenced by where the child lives, the amount of time the child spends with a parent, or the re-marriage of one, or both, of the parents.
Maintenance payments made to support children are known as ‘child support’. From a tax perspective, child support payments made by a non-custodial parent to, or for the benefit of, a child will generally have to be funded from after-tax income in order for it to be tax-free to the recipient.
As an alternative to making direct payments of child support from their after-tax income, the non-custodial parent could consider setting up a Child Maintenance Trust (‘CMT’), which may provide significant tax savings under the right conditions.
Specifically, income distributed from a CMT to a child who is a minor (i.e., under the age of 18) is concessionally taxed at adult marginal tax rates rather than at the penal rates of tax.
Broadly speaking, a CMT is most likely to be attractive where the non-custodial parent is a high-income earner with significant income producing assets other than the family home, superannuation, cars and personal effects. Furthermore, they must be comfortable leaving the assets to the child upon the vesting (i.e., ending) of the trust.
Given the complex rules surrounding a CMT, it is strongly advised that specialist advice be sought when setting up such a trust to ensure that all the intricate requirements are satisfied for the tax concessions to apply.