9 Arguments AGAINST Child Support ASSESSMENTS

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9 Arguments AGAINST Child Support ASSESSMENTS

There is no size fits all. For some, assessments are the way to go. For others, an agreement is a much better fit. And for a few, a combination of both works best.

Child support assessments have quite a few downsides. Nobody ever said they are ideal. So it comes down to weighing up the pros and cons of each solution.

So here are 9 reasons why assessments might not be for you – looking at it from the paying parent’s perspective (if you are the one receiving child support, some of this works the other way for you).

1 – Loss of Privacy

You have Services Australia poking around in your family affairs and your Ex talking to them about you. Neither of which is great.

2 – Big Brother Watching

You already have the ATO on your back. Now you also have Services Australia taking an active interest in how much you earn. And the two are talking to each other. Think double Big Brother.

If your tax set-up is already standing on wobbly legs, you don’t want to put more weight onto it.

3 – Services Australia Not on Your Side

Services Australia is meant to be impartial. However, the more you pay, the less Services Australia has to pay out in Family Tax Benefits, so it doesn’t take Einstein to work out how this one will go.

4 – Risk of System Errors

You depend on Services Australia to get it right. They don’t always do.

5 – Uncertainty about Future Payments

You never know how much you will pay in the future. Child support can become this higher force that seems to be constantly hanging over you and controlling your life.

6 – The More You Earn, The More You Pay

Assessments link your child support to your income. So the more you earn, the more you pay. The same applies to income tax. So both slow you down no matter how hard you work.

7 – Kills Motivation

Having your child support linked to your income can drain all motivation away. It can feel like there is just no point in working hard since it all goes to your Ex anyway.

8 – Creates Conflict

The less you see your kid, the more child support you have to pay. So there is a financial interest for the other parent to limit your time with your kid.

9 – CMT Not an Option

If you go for an assessment, you can’t have a child maintenance trust (‘CMT’). So you can’t finance your child support out of tax savings.
However, a child maintenance trust is complicated. Not many people do it. There are some strong pros and cons regarding a child maintenance trust. So the fact that you can’t have a CMT with an assessment, is not necessarily a strong argument against an assessment.
So you see. It all depends. 
All this sounds pretty bad. But you might still be better off with an assessment, despite all this. Here are arguments FOR an assessment: Why Do Child Support Assessments and Income Tax Go Hand-in-Hand?

10 Ways NOT To Reduce Your Child Support

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10 Ways NOT To Reduce Your Child Support

Here are 10 ways NOT to reduce your child support if you are the payer and receive child support assessments. It all depends on your Adjusted Taxable Income, which is your taxable income plus adjustments Services Australia makes.

Adjusted Taxable Income

When Services Australia assesses your child support, they start with the taxable income on your latest tax return.
But then they make adjustments or even a Change of Assessment to get to your Adjusted Taxable Income. And it is this Adjusted Taxable Income you get assessed on.

So it is all about reducing your taxable income while avoiding an adjustment or Change of Assessment.

Tax v Child Support

In principle, tax and child support pull in the same direction. Whatever reduces your tax, usually also reduces your child support. But not always.

So having cleared this up, here are 10 ways NOT to reduce your child support.

1 – Super Salary-Sacrifice

Salary-sacrificing super reduces your taxable income and hence your tax since the salary sacrifice happens out of your before-tax income. 
However, Services Australia adds your salary-sacrificed super contributions (reportable superannuation contributions) back. As a result, salary-sacrificing super doesn’t reduce your child support.

2 – Negative Gearing 

The losses you incur when you negatively gear a passive investment are reported in your tax return. 
Services Australia adds these investment losses back to your adjusted taxable income. So investment losses won’t reduce your child support either.

3 – Exempt Foreign Income

Some foreign income is exempt in Australia, meaning you don’t pay Australian income tax on it. The most common example is when you work overseas.

However, even though you don’t pay tax on exempt foreign income in Australia, you still pay child support on it, because Services Australia adds exempt foreign income back to your taxable income.

4 – Reportable Fringe Benefits

Your employer or company might pay certain expenses on your behalf. For example a company car, your rent or a gym membership.
These payments would not go into your taxable income, so you don’t pay tax on these (your employer pays FBT instead). However, Services Australia adds these fringe benefits back if they are ‘reported’ on your tax return as reportable fringe benefits.

5 – Non-Commercial Losses

The losses you incur in your business as a sole trader can only offset other income if you meet the non-commercial loss provisions.
If you don’t, you have to defer these losses, so they neither reduce your tax nor your child support. Eventually they will, but not in the year you incur the loss.

6 – Capital Losses

While investment losses get added back to your taxable income, capital losses don’t. So you might think that a capital loss will reduce your child support in the year of the loss.

But it doesn’t. Capital losses can only be offset with capital gains, but not with other income. So the capital loss just gets carried forward without having any effect on your child support until you have a capital gain.

7 – Sudden Drop in Income

You might restructure your affairs and then drastically reduce your income from one year to another.
In response, the other parent will most likely apply for a Change of Assessment and Services Australia will assess your income based on previous years.

8 – Not Lodging Tax Returns

Services Australia bases their assessment of your child support on your latest tax return. So you might think that one way around child support is to just not lodge any tax returns.

However, Services Australia will almost certainly assess a default income for you.

9 – Not Paying

At first, just not paying the assessed amount looks like an option. Currently, there is over AUD 1.5 billion in child support owed in Australia. 
However, you will probably receive a Departure Prohibition Order so you can’t leave Australia. And if you work as an employee, Services Australia can ask your employer to withhold child support directly at the source.

10 – Moving to a Reciprocating Country

Australia has reciprocating arrangements with a long list of countries. If you move to one of these, Services Australia will still be able to enforce your payment obligations. 

So this is how NOT to do it.  Here are your alternatives: 25 Ways to Pay Less Child Support

Makes sense? Reach out when you are ready.

25 Ways to Pay Less Child Support

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25 Ways to Pay Less Child Support

Here are 25 ways to reduce your child support if you are the payer. If you receive child support, then this is what to look out for. Some of these measures are more extreme than others. Some are legal, some definitely not.

So here is what you can do as the payer (and to look out for as the payee):

1 – Move Overseas

If you relocate to a country, which Australia doesn’t have a social security agreement with – for example, Cook Islands, Samoa, PNG, Yukon or Israel – then Services Australia can’t reach you, even if you stop paying altogether. You just face the music if you ever come back.
If you already owe child support at the time you want to leave, the Australian Federal Police might stop you with a Departure Prohibition Order.

2 – Do a Binding Agreement

If you think your career or business will grow and progress, then a binding agreement will lock your child support in at current levels. All future promotions are yours. Any increase in income won’t affect your child support.

3 – Apply for a Change of Agreement

If your current agreement is untenable, you can apply to the Court to reduce the agreed amount. You must give valid reason, like a serious illness, accident, or bankruptcy, 
With a binding agreement, all cards are on the table while you negotiate. Once you have signed, the only option left is to either move overseas or request a change.

Assessments

But ….if you are on an assessment, then your child support is linked to your taxable income. And that gives you 22 more ways to reduce your child support.

4 – Increase your Care Percentage

The more time you spend with your children, the less you pay. Try to get at least 2 nights per fortnight.

5 – Work Less

The less you earn, the less you pay. If your income is below the Self-Support Amount, you don’t pay any child support. 
In 2023, the self-support amount is AUD 27,508.

6 –  Work for Cash

Working for cash and then not declaring the income is a fraud, but it does save you tax and reduces your child support.

7 – Increase Work-Related Expenses

In your previous life, work-related expenses saved you income tax. Now each dollar you claim in work-related expenses gives you a double-whammy of less tax AND less child support.

8 – Increase Non-Reportable Fringe Benefits

Most fringe benefits are reportable. Reportable means they are ‘reported’ on your tax return. That means Services Australia can see them thanks to their data sharing with the ATO and adds the back to your income.
However, some fringe benefits are not reportable and so don’t get added back. Go for those ones.

9 – Run Your Own Business

Running your own business gives you more options to influence your income. How much depends on your set-up. Make sure your tax agent works with you on this one.

10 – Re-Invest Profit

Invest profit back into the business. For example, buy assets that qualify for an immediate write-off, ramp up your marketing and business development, or hire more staff. But only do what makes sense business-wise. Don’t spend money just to get a tax deduction.

11 – Avoid Non-Commercial Losses

If you have other income, make sure your business losses qualify as commercial losses so the non-commercial loss provisions don’t apply.
If you incur non-commercial losses, they get deferred, so reduce neither your current tax nor your current child support.

12 – Focus on Expansion

Focus on expansion and new business ideas, By the time these bear fruit, you might no longer be paying child support.

13 – Invest for Capital Gains

If you invest for income, that income will increase your child support. Examples are high-dividend stocks or commercial real estate.
But if you invest for capital gains, you can postpone realising that capital gain until you are well and truly out of child support territory.
Examples are residential property and cryptocurrency.

14 – Hold Assets in Another Name

Buy income-producing assets in another person’s name who you trust, for example, your parents. But consider how this affects their pension or other benefits. 

15 – Hold Assets Within a Trust

Hold income-producing assets within a discretionary trust that you don’t control, and then have trust income distributed to other beneficiaries while you are on child support.
For you not to control the trust, make sure you are neither the appointor nor the trustee nor the specified individual, and the trust has at least three beneficiaries.

16 – Offset Capital Losses

Services Australia adds investment losses aka capital losses back to your taxable income to calculate your child support. 
Let’s say your property makes a $500k loss over five years and then a $500k profit over the following five years. So all up your child support should be zero since you didn’t actually make any money. 
However, this is not how it works. Services Australia will add the loss back to your income, so you pay a lot more child support than if you had evened out the return.

17 – Be Proactive

If your circumstances significantly change and you can foresee your income dropping by at least 15%, tell Services Australia. They don’t backdate and hence you don’t get a refund for overpaid child support. 

18 – Time Your Lodgement 

If your income has dropped, lodge your tax return as quickly as possible since Services Australia bases their assessment on your latest tax return lodged.
But if your income has increased, then register with a tax agent to extend your lodgement deadline from 31 October to a later date. Yes, you will have to pay catch-up but it buys you time.

19 – Avoid a Change of Assessment

The other parent can request a change of assessment, for example, if your income suddenly drops and you can’t explain why. 
Services Australia usually favours the applicant (ie. your ex) in a change of assessment, so best to avoid this. 

20 – Keep your Income Steady

Keep your income steady. To achieve that, you must start as early as possible to optimise your child support.
For example, if you are on $60k one year, $120k the next, and then $60k again in the third year, you run the risk that Services Australia locks you in at $120k through a Change of Assessment.

21 – Become a High-Income Earner

As your income increases, the percentage of your income going to child support decreases. Once you hit a certain threshold (AUD 206,310 from 1 January 2023 onwards), any additional income is no longer subject to child support.

22 – Have Another Child 

Of course, you won’t have a child just to decrease the child support for another child.
But if you decide to have a child with your new partner for all the right reasons, then the child support for your other child will most likely go down.

23 – Encourage Your Ex to Work

The smaller the difference between your incomes, the less you pay.
Contrary to common belief, your child support is actually not about how much you earn in absolute terms, but about the difference between the two incomes.

24 – Apply for a Review

Apply for a receiver income review, if the other parent could work or could work more but chooses not to. This one depends on the age of your children and the respective care percentages.
To learn more about the framework for reducing your child support:  5 Things That Determine Your Child Support

25 – Layer Across Tax Havens

Due to the data-sharing agreements of tax agencies across the globe, this no longer works as well as it used to in days gone by.
However, there is still some room to ‘park’ overseas income by layering a structure across several jurisdictions, using nominee directorships and bearer shares (most likely qualifies as tax evasion).
This only works if the income is derived overseas and stays overseas. Once the income is connected to Australia, it is almost impossible to move it back overseas without catching AUSTRAC and the ATO’s attention.
So these are 25 ways to pay less child support. All this might sound straightforward, but the devil is in the detail. So make sure you get an accountant who understands child support to help you.

Makes sense? Reach out when you are ready.

Pass a PSB Test To Pay Less Tax

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Pass a PSB Test To Pay Less Tax

If your business provides a service and you want to pay less tax, you have three ways to do that.

1- You pass the 50% PSI Test. The 50% PSI Test looks at whether you even have PSI. Great if you don’t. Then you can stop right here.
2 – You pass one of the four PSB tests and qualify as a PSB.
3 – You ask the ATO for a PSB Determination if you fail the last two PSB tests because you didn’t make it over the 80% hurdle
So let’s look at the 4 PSB Tests.

PSB Tests

To qualify as a PSB you need to pass one of the four PSB Tests.

PSB Test no. 1: 75% Results Test

Do you produce a result using your tools at your own risk for at least 75% of your work?
You need to tick a – Result, b – Tools, c – Risk and d – 75% to pass this test. If you do, you qualify as a PSB and can stop right here.
80% Threshold
To pass one of the remaining three tests, you must earn less than 80% of your revenue from your largest client. If your largest client pays you 80% or more, the law will treat you like an employee. So no PSB.

PSB Test no. 2: Unrelated Clients

To pass you must advertise your services to the public and get at least two unrelated clients as a result of that. This ‘as a direct result’ is important. There must be a causal link.

PSB Test no. 3: Employees

To pass you must have at least one employee who does at least 20% of the principal work – measured by market value. Clerical and administrative work doesn’t count.

PSB Test no. 4: Business Premises 

To pass, you must work out of business premises that are separate from your home and you have exclusive use. So shared workspaces or home offices don’t count.

PSB Determination

If you fail the employees and business premises test because you went over the 80%, then you can ask the ATO to be nice and give you a PSB determination so you can still qualify as a PSB.

Pay Less Tax

Pass one of these four PSB tests or get a PSB Determination to qualify as a PSB and pay a lot less tax.

If you get stuck, please tell us what the problem is.