In Australia, child support is generally determined by an administrative assessment. These are undertaken by the child support branch of the Department of Human Services (commonly referred to as the Child Support Agency or CSA).
In determining this assessment the Child Support Agency ultimately considers eight factors, the most significant of these being:
- The age of the child
- The length of time the child spends with each parent
- The adjusted taxable income of both parents
Most people are aware that, as an alternative to being “clients” of the Child Support Agency, they can enter into a Binding Child Support Agreement with each other. These agreements can include who pays for things like the child’s private school fees, medical and dental expenses, private health insurance premiums, out of pocket expenses and extra-curricular activities, in addition to any cash payments that are to be paid by one parent to the other.
As an alternative to a Binding Child Support Agreement (which operates until the date each child turns 18) parents can enter into a Limited Child Support Agreement which sets out each parent’s financial obligations for their child for a period of up to three years.
Did you know that there are other ways to determine parent’s financial support for their children?
Some of the more common methods include:
- Non-Periodic Child Support (Lump Sums)
Lump sum child support can provide parties with more flexibility when determining how they want to receive or pay child support, and are generally considered in two situations:
- Where there are difficulties in enforcing periodic child support payments; and
- Where the parents are asset rich but cash poor.
In addition to this, the Family Court has ordered a parent to pay child support as a lump sum where:
- that parent has or is likely to manipulate his or her affairs to receive a nil assessment;
- that parent takes every possible step to avoid payment of the correct amount of child support;
- Evidence demonstrates that that parent will not voluntarily pay any child support to the other parent.
- Security as an Alternative to Lump Sum Orders
As an alternative, the parents may agree (or the Court may order) that the parent liable for child support deposit a lump sum amount into trust, which is paid to the other parent on a periodic basis.
This has become a fairly common practice as it is seen to combine the benefit of periodic child support payments with the security of lump sum payments.
This alternative can often be seen as a solution to allay any concerns that the parent who is to receive the periodic payments does not have access to a lump sum amount which could be dissipated before the child’s financial needs have been met.
- Substitution Orders
Courts may order (or parents may agree that) instead of one parent making a periodic cash payment to the other parent, that parent can pay expenses relating to the child, directly to a third party. For example, payments to schools for education expenses, uniforms, books and activities. In some circumstances, the parents can agree that mortgage repayments can be paid in lieu of child support.
- Child Maintenance Trusts
Child support payments from one parent to another must be paid with after tax dollars – they are neither deductible nor able to be claimed as a rebate for tax purposes. Conversely payments through the Child Support Agency are generally exempt from tax, in the hands of the parent receiving the payments.
In certain circumstances, income of children may qualify as “excepted assessable income” for tax purposes. Under the establishment of a Child Maintenance Trust, the income of that Trust, used for the child’s benefit, is not subject to the penal rate of tax that would normally apply to the unearned income of a child.
The primary conditions for a Child Maintenance Trust include:
- Assets (including shares, real property or cash) must be transferred into the Trust. This means that existing Trust arrangements won’t qualify.
- Income generated in the Trust must be derived from the Trust assets, on an arm’s length basis.
- The assets must vest in the child, as the beneficiaries of the Trust, when the Trust ends or “vests”. The maximum duration of a Trust is 80 years.
There range of options available to separated parents in determining how to best to pay, and to receive, financial support for their children. Options that allow for significant flexibility, that may better suit each parent’s needs and that may be more tax effective.
Article written by: Dan Buckley and Kiara Greenway