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Why Do Child Support Assessments and Income Tax Go Hand-in-Hand?

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Why Do Child Support Assessments and Income Tax Go Hand-in-Hand?

Why do child support assessments and income tax go hand-in-hand? The answer is simple. Whatever reduces one usually also reduces the other.

If you pay child support and receive child support assessments, the higher your income the higher your child support.

Guess what. Your income tax is the same. The higher your income the higher your income tax. So whatever you do to reduce your tax, often also reduces your child support if you are the one paying child support.

The same applies to deferring part of your income. Whatever you do to defer income for tax usually also defers your income for child support.

However, some things work for tax but not for child support: 10 Ways NOT To Reduce Your Child Support

Makes sense? Reach out when you feel ready. It all depends on the details.

Who Does What Around Child Support?

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Who Does What Around Child Support?

There are family lawyers, child support lawyers, tax lawyers, and child support tax agents. Most couples never use any of them. But the higher the income and wealth at stake, the more help you need to manage child support – to pay less if you are the payer or receive more if you are the payee. So let’s look at who does what?

Family Lawyer

A family lawyer helps you with the legal side of a relationship breakdown, like property settlement and custody arrangements.
Less than 30% of separating couples get a family lawyer. 

Child Support Lawyer

A child support lawyer is a family lawyer who specialises in child support. They help you negotiate your child support arrangements and draft your agreement.

A child support lawyer doesn’t replace your family lawyer. They just come in as a specialist when you need an expert. 
Most couples don’t involve a child support lawyer. It all depends on how much income and wealth there is, and how much you want to lawyer up. 

Tax Lawyer

A tax lawyer often comes in when you either face significant capital gains tax issues or want to set up a child maintenance trust. 

Accountant

Your accountant – make sure they understand child support and tax – helps you structure your affairs to optimise your child support and tax. Lawyers know the law, but accountants know the numbers and tax (assuming they are registered tax agents).
Involve us early if you are negotiating an agreement, since agreements are hard to change once signed.
The same applies if you are thinking about a child maintenance trust (‘CMT’) since a CMT only works if set up at the time of separation. 

Makes sense? Just reach out when you are ready.

Five Things That Determine Your Child Support

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Five Things That Determine Your Child Support

The amount of child support you pay or receive is not a number that fell from the sky. It is calculated. What you pay or receive, depends on the following five things.

1 – Child Support Arrangement

2 – Income

3 – Care Percentage

4 – Other Children

5 – Ex’s Income.

Let’s look at this from the paying parent’s perspective (if you receive child support, read this the other way around).

1 – Your Child Support Arrangement

There are four types of child support arrangements. The two most common ones are assessments and agreements.
If you use child support assessments, your child support will fluctuate as your income, care percentage and number of your other children.
If you signed an agreement, that agreement would have considered the following four things. But once you signed, your child support is locked in – unless you make a new agreement.

2 – Your Income

The more you earn, the more child support you pay. Depending on the type of your income and the structure of your wealth, you can influence the amount of that income.

As an employee, there is some wiggle room but not much.

As a contractor, you have a bit more space, how much depends on your set-up.

But if you run a full-fledged business with third-party employees, the world is your oyster.

In addition, you can use companies and trusts to split and defer your income. For this one, you need an accountant who understands child support.

3 – Your Care Percentage

The more time you spend with your children, the less you pay if you use assessments – as long as you spend at least 30% with your children.

4 – Your Other Children

The more children you have, the less child support you pay for a child.

Let’s say you have a child from your teenage years but are now happily married with children. The more children you have with your wife, the less child support you pay for your first child.

5 – Your Ex’s Income

The less difference between your income and the other parent’s income, the less you pay.

Summary

The more you can control these five things, the more you control the amount of child support you pay or receive.

Here is more: 25 Ways To Reduce Child Support

Makes sense? Just reach out when you are ready.

6 Arguments AGAINST Child Support AGREEMENTS

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6 Arguments AGAINST Child Support AGREEMENTS

Without a child support agreement, family law will dictate how much child support there is to pay based on both parents’ income, care percentages, and other dependent children. With an agreement, you decide this between the two of you without involving Services Australia or the law.

Anybody can enter an agreement. Most parents enter an agreement when there is significant income or wealth or when the parents want certainty.
Whether you are better off with an agreement or an assessment depends on your circumstances. But it also depends on whether you pay child support or receive it.
So let’s look at this from the paying parent’s perspective (if you receive child support, some of this affects you the same way and some works the other way for you).
Here are 6 arguments against child support agreements, assuming you are the payer.

1 – Legal Fees

You need a family or child support lawyer to draw up the agreement and that of course costs money. So an agreement usually only makes sense when you have enough wealth or income to warrant such an expense.

2 – Binding

A binding agreement is just that: binding. To change it, you usually have to go to court, unless the other parent agrees to the change, which they usually don’t.

3 – Inflexible

If you hit hard times, bad luck. Agreed is agreed. An agreement is about a fixed amount or fixed expenses. It doesn’t link your child support to your income.

4 – No Wiggle Room

Since an agreement doesn’t link your child support to your income, you can’t change your child support by changing your income.
However, if you are an employee or contractor working for yourself, then your wiggle room to adjust your income is very limited anyway.

5 – No Family Tax Benefit

If you enter into an agreement, then the parent receiving child support usually doesn’t qualify for the Family Tax Benefit, hence they will require more support from you.
We say ‘usually’ since there are some exceptions to the rule. For these exceptions, we involve a child support lawyer.

6 – Higher Child Support

An agreement usually results in perceived higher child support. Otherwise, why would the receiving parent sign an agreement? So that would be a downside for you as the payer. But we say ‘perceived’ for a reason. It all depends on what your future incomes do over the years.
So these are 6 arguments that might speak against entering an agreement. But make sure you also consider the other side: 7 Arguments FOR Child Support AGREEMENTS

Makes sense? Reach out when you are ready. There is no size fits all.

7 Arguments FOR Child Support AGREEMENTS

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7 Arguments FOR Child Support AGREEMENTS

Whether you are better off with an agreement or an assessment depends on your circumstances including the amount of income and wealth at stake. But it also depends on whether you pay child support or receive it.

Here are 7 arguments FOR an AGREEMENT, assuming you are the payer – read this the other way around if you receive child support.

1 – Extras

You can agree on one parent paying specific expenses, for example, private school fees and health insurance. 
So if you are the payer, rather than paying money to the other parent and God knows what they spend it on, you pay directly for things that are important to you.
And if you are the payee, you have certainty that these extras are covered for good and don’t get caught up in other disagreements and tugs-of-war.
Assessments try to mimic this flexibility by allowing Non-Agency Payments, but these NAPs are a minefield for misunderstandings. So if you want to lock in extras, an agreement does that.

2 – Time with your Children

In an assessment, the receiving parent has a financial incentive to limit your care percentage. The less you see your kids, the higher the child support they receive. 
With an agreement, that financial incentive is gone. So the other parent is usually more open to expanding your contact hours.

3 – Certainty

Better the devil you know than the one you don’t. With an agreement you know exactly what you will pay and you can plan accordingly.
You no longer fear letters from Services Australia increasing your child support yet again.

4 – Future Free

Your child support is not linked to your income. So as your career progresses or your business grows, your child support stays the same. Future gains are all yours. So it doesn’t stifle your motivation in a way an assessment might do.

5 – No Services Australia

Once all is signed and dusted, you can farewell your lawyers and hopefully will never hear from Services Australia again.

6 – Got your Back

Services Australia is usually not on your side. But your lawyer negotiating the agreement for you is.

7 – Child Maintenance Trust

Your agreement can include a Child Maintenance Trust (‘CMT’). You transfer capital out of before-tax income into the trust and then distribute it to your children at adult tax rates.
So these are some of the advantages an agreement has. But make sure you also consider: 6 Arguments AGAINST Child Support AGREEMENTS

Makes sense? Just reach out when you are ready. The devil is in the detail.

8 Arguments FOR Child Support ASSESSMENTS

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8 Arguments FOR Child Support ASSESSMENTS

Child support assessments are the most common form of child support arrangements in Australia. While they are not the best thing since sliced bread, there are some strong arguments in their favour.

Here are eight arguments For an ASSESSMENT – assuming you pay child support. If you receive child support, read this the other way around:

1 – Gives you a Break during Hard Times

If you hit hard times, your child support also eases off. The link to your income works both ways.

2 – Considers Other Children

The assessment formula takes other children into account. So if you re-partner and have another kid, child support to your ex will decrease accordingly.

3 – Considers Your Care Contribution

The higher your care percentage, the lower your child support. So you can reduce your child support by spending more time with your kid.

4 – Shields You From the Other Parent

You don’t have to talk to the other parent about child support. Services Australia does it for you.

5 – Saves You Legal Fees

You don’t need a family lawyer, hence assessments come without legal fees attached.

6 – Results in Lower Child Support

An assessment usually results in lower child support than an agreement at the time you make the agreement. Otherwise, why would the other parent sign an agreement?

7 – Gets you Family Tax Benefit

You can only get a Family Tax Benefit with an assessment (assuming you meet some other criteria as well). With a child support agreement, you are usually barred from Family Tax Benefit unless you engage a child support lawyer who can help you around this pitfall.

8 – Gives you Wiggle Room

An assessment allows you to optimise your child’s support. This is where we come in and make a difference. However, how much wiggle room you have depends on your circumstances: 5 Things That Determine Your Child Support

Summary

So these are 8 arguments FOR Child Support ASSESSMENTS. But also consider the: 9 Arguments AGAINST Child Support ASSESSMENTS

Makes sense? Just reach out when you are ready.

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.