Child support payments are a complex business but the level of difficulty is increased dramatically when superannuation benefits are added to the mix especially if Self Managed Super Funds are involved.
The purpose behind child support payments is to enable separated parents to provide support for their dependant children. The Child Support Agency which is part of the Department of Human Services administers these payments.
Typically child support payments are determined by a formula which combines each parent’s income, determining how much it costs to raise each child and then works out each parent’s share of this cost.
The purpose here isn’t to discuss the rights and wrongs of how this process works – it is unrealistic to assume the whole process will operate perfectly for everyone.
Income for CSA purposes includes your taxable income, reportable employer fringe benefits, salary sacrifice super contributions, net investment losses, tax free pensions and annuities and foreign income. Your total income from last financial year determines how much you owe this year. The CSA uses information you and your child’s other parent supply as well as relevant data from the Tax Office.
Of key interest here is how a parent’s income is worked out especially when super funds are added to the mix.
Initially let’s consider lump sum withdrawals. Every super benefit is split between Taxable and Tax-free Components with the Taxable Component potentially included in your personal taxable income.
If you take a lump sum out of your super fund before age 60 then the Taxable Component receives tax concessions. For example if your money is in a non-public sector super fund then the first $195,000 (in 2015/16) of all your lump sum withdrawals paid is tax-free. Amounts above this threshold are taxed at 15 per cent plus the Medicare Levy.
However initially the Taxable Component of lump sum super withdrawals are included in your taxable income and taxed at normal marginal rates. The concessional tax rate is then delivered via tax offsets. A similar process happens for some employer lump sums paid if your employment is terminated.
Once you hit age 60 then any lump sum benefits you take from super aren’t taxed and are excluded from your taxable income.
Clearly if you take a lump sum out of super before age 60 and you make child support payments then you might find that your taxable income is inflated which means higher payments the following year.
Now let’s consider superannuation pensions.
If you take a Transition to Retirement (TtR) pension between your preservation age (age 55 if born before July 1960) then you must receive income of between 4 per cent and 10 per cent each financial year.
It appears that the Child Support Agency assume that you take the maximum income possible from these pensions even when if you elect to take a lower income.
What about all other account based pensions payable after you’ve retired? The rules for these pensions say that there is a minimum income that must be paid each financial year but no maximum. That is, all of the pension’s account balance can be taken as one or more income payments in any year. This means that for child support payment assessment purposes the whole of the pension account balance could be counted as income.
What happens if you run a Self Managed Super Fund? The CSA will receive data from the Tax Office about the SMSF including the income earned by the fund as well as the fund’s total assets. In some cases these values are then used for child support payment determinations.
The problem here is that some of the income earned by the fund and the fund’s assets may have nothing to do with you as these may be attributable to other members of your fund.
Those making child support payments may be best not to take pensions or taxable lump sums while they have to make child support payments. They may also want to be think careful about using a SMSF.
ADF Financial Services Consumer Centre