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Child Maintenance Trusts - Raising kids is an expensive business. Things can become even more expensive if you have been involved in a family breakdown. Are you paying child support or maintenance? If so, you may be paying too much in tax. A Child Ma

I just had a friend over to visit, she informed me that they have a family trust fund set up that all their income goes into and are paid a weekly wage so to speak. Now her husbands an accountant (no doubt) and earns well into the 80's.

Now his taxable income through this set up is setting his taxable income at under 40k per year and now eligible for health care card and subsequently pays bugger all child support. Now I didnt want to seem rude to this lady and drill her for more information. Has anybody any knowledge on this? Sounds like the way to go…

I think you supplied the answer - you would need to be an accountant to work this one out.

This will only work if you run your own business. No doubt he has his wife "working" for the business as well, the cars are paid for by the business and he probaby makes investments through the business that are losses. Probably all furniture bought for home is for the "home office".

Not much use to the average PAYG earner….

Junior Executive of SRL-Resources

Executive Member of SRL-Resources, the Family Law People on this site (Look for the Avatars). Be mindful what you post in public areas. 
Interesting to look into this accountant works for the owner of the business, Im going to talk to my accountant about it this tax time no harm in asking.
I know mothers working in Family Day Care who set up as their own business (and could feasibly do the same thing), earn a fair amount of money which is claimed under the business allowing them to claim more CS.  All perfectly legal, and feasible for the average Jo(e) Blow.

When you are swimming down a creek and an eel bites your cheek, that's a Moray.
Hey -if your adding this - it seems reasonable to look at the ways - probably in a secured forum - where people can use the same sorts of Tax Arrangements that the politicians use to MINIMISE their TAX and the obligations. They are after all - the experts and they make the law.

Maybe I am not explaining myself well enough

Child Management Trusts

Child Maintenance Trusts
Raising kids is an expensive business. And things can become even more expensive if you have been involved in a family breakdown.

Are you paying child support or maintenance?

... If so, you may be paying too much in tax.

A Child Maintenance Trust may be the answer.

What is a Child Maintenance Trust?

A Child Maintenance Trust (CMT) is a legal structure that allows payments on behalf of your children.

A CMT holds assets for the benefit of your children. Income created from the trust property can be paid to you children (or their guardian) to cover maintenance.

Your children can access the trust funds when they reach "vesting age".

Who can set up a Child Maintenance Trust?

You can set up a CMT if you have been involved in a family breakdown and you have legal obligations to pay maintenance to (or on behalf of) your children.

The Income Tax Assessment Act defines a "family breakdown" in broad terms. A "family breakdown" generally relates to the end of a domestic relationship (such as marriage or de facto relationship).

You do not necessarily need to be divorced to be in a family breakdown - you may just be separated.

A CMT can also apply where children are born outside a domestic relationship.

Both parents have to agree to the CMT. This is usually negotiated as part of an overall property settlement between the ex-partners.

To receive the tax benefits of a CMT, the payments must be required to be made as the result of a court or administrative order.

Why set up a Child Maintenance Trust?

For many people, a CMT is a tax-effective way to pay child support.

If your children are minors (ie: under 18) and are not in full time employment, they will have a much lower tax-free threshold than you. And they will not have access to the graduated marginal tax rates that adults enjoy.

This means your children will be taxed at the top marginal tax rate for any income apart from wages (such as interest, dividends and payments from a trust).

But, if payments are made through a CMT, the income is classed as "exempted trust income" for the purposes of the Income Tax Assessment Act 1997 . This means the trust income is taxed at the same rate, and with the same tax-free threshold as adult income.

A CMT is also a good way to set aside assets for your children. That way you can make sure your children will be provided for, even though your family has broken down. This kind of arrangement means that all parties are clear about the financial support you will provide your children.

The trust assets are also protected from external creditors if you become bankrupt.

Investment of trust property

You may also be able to use the trust assets for commercial purposes, as long as the arrangements are entered into on an "arm's length" basis. That is, you cannot invest a small amount of funds to derive a large income flow.

The Commissioner of Taxation will assess the income derived from CMT arrangements. If the trust is not administered correctly, the trust income may not receive the tax benefits you planned for.

You should speak to your lawyer and financial advisor before considering the investment of trust funds.

What do you stand to save?

Currently, a minor who is not in full time employment can only earn $416 before their income is taxed. Every non-employment dollar they earn over $416 will be taxed at a whopping 48.5% (including the Medicare Levy).

If payments are made through a CMT, however, your children can earn $6,000 in child support payments before they start paying tax. The remaining income will be taxed in the same graduated way that adult income is taxed. You can make substantial tax savings in this way.

For example, if child support is $15,000 each year without a CMT, you would have to pay approximately $14,000 in tax. That would make a total of about $29,000 each year. But if the same amount ($15,000) is paid through a CMT, the tax liability is only approximately $2,000, making a total of about $17,000. In other words, you stand to save $12,000 in tax each year.

If you have obligations to make payments to more than one child, over a number of years, you can make large potential tax savings by using a CMT.

Is a CMT for you?

The initial property settled on a CMT should have a value of at least $300,000.

Therefore, setting up this kind of trust can be of great benefit to you if you earn over $80,000 and hold other assets. The funds settled on the trust can be borrowed, as long as you eventually repay the capital and hold the funds for the benefit of your children.

A CMT will be particularly useful if you are required to pay child maintenance for a number of years. And if you have more than one child, the benefits can be substantial.

It is important that you and your ex-partner both agree on the establishment and functions of the trust. Make sure you get independent legal and financial advice before setting up a CMT. There is a lot of money - and your children's finances - at stake.

At Watson and Watson, we have the experience to guide you through process of setting up a child maintenance trust. That way, even though you have been through a family breakdown, you can rest assured that your children will be provided for. And you'll be glad to know your payments are going to your children, not the taxman.

Types of trusts
The following are examples of the types of trusts encountered in propertysettlementproceedings:

Fixed trusts -- (the beneficiary of a fixed trust has fixed entitlements (subject to the hybrid: fixed -- discretionary trust) as to one formof interest or a combination (eg a life interest followed by a remainder).

Unit trusts -- (unit trusts are trusts in which the trust property is vested in a trustee under a trust deed whereby the trustee is bound to deal with the property as directed by a manager(s) and in which the beneficial interest is divided into a number of units which can be sold or granted as the case may be by the original beneficial or initial unit holder. Unit trusts are created by a settlementand a unitholder has an interest in all of the property and income of the trust as soon as it is derived. This is distinct from the interest of a shareholder who has no interest in the assets of the company (refer Charles v FCT (1954) 90 CLR 598)).

Bare trusts -- (eg nominee holders of property).

Discretionary trusts -- (by and large the predominant formof trust involved in property settlementproceedings. The trust provides the trustee with unfettered discretion to allocate the trust property ie income and capital within the range of beneficiaries. No beneficiary has any entitlement to any part of the trust property until the trustee has distributed capital and/or income to them. This chapter will be limited to discussion about discretionary trusts).

Constructive trusts -- (a trust arising by operation of law found to exist by courts by virtue of the common intentions of the parties or no intention, but it is unconscionable for the legal owner to deny the beneficial interest of the others. Sometimes, one or both parties to the marriage will claim a beneficial interest in property legally held by a third party. They may claim that the third party holds the property on a constructive trust, and therefore the property ought to be brought to account in the property settlement. Pursuant to the new Pt VIIIAA of the Family Law Act 1975, proceedings against a third party alleging a constructive trust can be commenced in the Family Court, joining the third party as respondent, and relying upon the provisions of s 79 and s 90AE of the Family Law Act. See, however, commentary on the new Pt VIIIAA below at 41-515.

Resulting trust or implied trusts -- (arise by operation of law upon a failure to dispose of the entire beneficial interest in property under a settlementtrust or upon acquisition of property by one person in the name of another without any intention to gift). (refer Gray and Gray (2005) FLC 93-228 (which applied the principle in Calverley v Green (1984) FLC 91-565)).

Secret trusts -- (refer Palmerston Hospitals Pty Ltd v Holmdore Nominees (1992) FLC 92-275).

Trust deeds for superannuation funds.

What is done for you, let it be done, what you must do, be sure you do it, as the wise person does today that what the fool will do in three days - Buddha
Excellent work verdad.

I knew trusts seem to be the tax method of choice for many people - that and now self managed super funds - given the recent tax changes.

Combine this thinking with Tax deductions and so on and maybe some of us (even with not accounting background) can start to understand some of the benefits of the Tax system that others have been using for years.

Maybe I am not explaining myself well enough
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