(Section 102AG and Section 102AGA Income Tax Assessment Act (1936) as amended)
A Child Maintenance Trust can be a tax effective way of providing financial support for children following a marriage or relationship breakdown.
1. What is a Child Maintenance Trust?
A Child Maintenance Trust is a Trust set up to provide support for a child or children where there is an obligation to provide financial support (maintenance) for the child and income that is distributed to the child (or physically to the Trustee of the Trust on behalf of the child) is taken to satisfy that obligation.
A Child Maintenance Trust can only be established:
- Following a family breakdown;
- When both parents consent and then agree upon the terms of the Trust;
- Where the contributing parent derives a taxable income of at least $80,000 per annum;
- Where the initial property or cash settled on the Trust has a value of at least $200,000.
The relevant provisions enabling a Child Maintenance Trust to be established are contained in Divisions 6AA, Section 102AG and Section 102AGA of the Income Tax Assessment Act (1936) as amended.
2. What is a Family Breakdown?
Section 102AGA defines family breakdown to include legal obligations arising not only from the breakdown of live-in relationships such as marriage or de facto relationships, but also where parentage has occurred outside of such a relationship eg: conception occurring from a one night stand.
Section 102AGA(b)(ii) and (iii) also makes it clear that Child Maintenance Trusts can apply to adopted children and step-children.
3. How does a Child Maintenance Trust provide tax benefits?
Any unearned income received by children is taxed at the rate of 66%. However, income allocated to children from a Child Maintenance Trust is treated as excepted trust income and then the adult tax rate, including adult tax rate benefits, applies.
The essential criteria for the establishment of a Child Maintenance Trust and to ensure that the income generated by that Trust is excepted trust income includes:
(i) There must be a family breakdown
The property (including payment of monies) which will generate income (maintenance) must be transferred to the child or children, including the Trustee of the Trust of which the child or children are the beneficiaries) as a consequence of the family breakdown.
(ii) The assets of the Trust to be beneficially owned by the child or children
The maintenance which the children receive must be income which comes from property, including monies, which has been transferred beneficially to the children i.e. under the terms of the Child Maintenance Trust, the children acquire the Trust property. When the Trust ends, the property of the Trust is to vest in the children or if they die before the Trust vesting, the Trust property passes to their estate.
(iii) The Trust must generate investment income
The income generated by the investment through the Child Maintenance Trust and payable to the child or children must be derived by the Trustee of the Trust from the investment of any property transferred to the Trustee for the benefit of the child or children.
Excepted trust income in this instance would not include, for example, where the Child Maintenance Trust received distributions from another Trust or other entity, which distributions were not generated by any loan or subscriptions which the Child Maintenance Trust had made to that other Trust or entity.
(iv) Maintenance, education or advancement of the child
The income of the Trust can only be used for the maintenance, education or advancement (eg: orthodontic, medical expenses, buying a car to get to and from part time jobs or school etc) in order to obtain the tax consequences and be classified as excepted trust income.
(v) Arms Length return on the investment
To attract the concession and have the trust income classified as excepted trust income the income derived from the investment of property (or monies) must not exceed an arms length return on that investment of that property.
(vi) Transfer pursuant to an Order, Determination or Assessment
Firstly there should be a new Trust established. Use of an existing Trust is not acceptable. To be excepted trust income, the income coming from the investment of property transferred to the child or children, or their Trustee, the transfer must be pursuant to (Section 102AGA(2)(c)) an Order, Determination or Assessment of a Court, person or body. This could be an Order of the Family Court or an Assessment from the Child Support Agency.
It is unlikely that a Child Maintenance Trust would be attractive to parties who:
- Are not of considerable wealth;
- Have not had a family breakdown;
- Have no level of ongoing trust and are likely to argue between themselves about who controls the Trust and how and when distributions from the Trust should occur;
- Do not have a child or children with a number of years of maintenance until they reach 18 years of age; and
- Might be uncomfortable about leaving some assets to the child or children at the vesting date.
- In addition to the matters referred to above, there are four other important matters to be very carefully considered in relation to the establishment of a Child Maintenance Trust:
(a) Unlike other Family Court Orders which can provide some capital gains tax (CGT) rollover relief upon the transfer of assets, no such relief currently exists when property is transferred into the Child Maintenance Trust. The incidence of CGT is triggered. That is one of the likely costs in establishing a Child Maintenance Trust. That cost will depend upon a host of factors including the value of the property being transferred.
(b) There may well be stamp duty to pay on the transfer of property into the Child Maintenance Trust. This will again depend upon many factors including the identity of the transferor and the Trustee/transferee and of course the amount of the potential stamp duty will depend upon the value of the property being transferred.
(c) There will be the cost of maintaining the Trust including the provision of annual financial statements and returns as well as the common requirement between ex spouses for an annual accounting in relation to the Trust; and
(d) It is very important that the parties, lawyers and tax advisers work collaboratively to undertake a cost benefit analysis when considering the merits in establishing a Child Maintenance Trust.
Child Maintenance Trusts are seldom used but can provide considerable benefits. Any consideration of establishing such a Trust should certainly involve advice from your lawyer in conjunction with your accountant/tax adviser.