Tax Planning Strategy 188 | Child Maintenance Trust

Tax planning strategy 188

A Child Maintenance Trust (CMT) is a special type of trust set up and established with income earning assets (typically shares or property) to provide support for a child (or children). Under the CMT deed the capital assets can only be distributed to the children for whose benefit the trust was established, but trust income can be distributed to any beneficiary (although normally only the children).

Most commonly, CMT arrangements are put in place where there is an obligation to provide maintenance for a child. Agreements that income flowing under a CMT arrangement would reduce maintenance obligations have generally been embodied in consent orders made by the Family Court of Australia. Despite their substitution of before-tax income for after-tax income, these agreements generally provide that a dollar of income under the CMT arrangement fully satisfies the obligation to provide a dollar of tax-exempt maintenance income. 

A CMT arrangement is attractive where the person who is required to provide maintenance payments for the child faces high marginal tax rates on their own income. The CMT allows them to pay for the maintenance payments in pre-tax dollars instead of after-tax dollars, so effectively saving up to 48.5% tax.
 
Income flowing to a child under a CMT arrangement is not exempt from income tax under section 51-50 of the 1997 Act as a maintenance payment. Where the income flowing under the CMT arrangement is less than the $18,200 tax free threshold, and is the only income of the child, the income tax payable by the child will be nil. However, the marginal tax rate that the child faces where other income is derived, for example from employment, may be higher.