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An important time to consider tax liability is following a relationship breakdown. A tax effective way to provide financial support for your children is by establishing a Child Maintenance Trust ("CMT").

The payment of child support is generally made from a person's after tax income. Unlike payments to children under 18 from discretionary family trusts, payments to children from a CMT are taxed at ordinary adult rates. Child Maintenance Trusts therefore provide a very tax effective mechanism of paying child support.

Requirements for establishing a CMT are set out in the Income Tax Assessment Act 1936. Essentially a transfer of income producing property is required, which can include real property, cash, shares or even a flock of sheep.

Other requirements for a CMT are:
• A family breakdown has occurred.
• An Order, determination or assessment has been made, by the Child Support Agency or the Court requiring the payment of child support.
• The assets of the CMT must be beneficially owned by the child, therefore the child ultimately receives the trust capital.
• The CMT must generate investment income, which is used primarily for the maintenance, education and advancement of the child.
• The transfer of assets must be at arms length, meaning they have their true value.

There is currently no capital gains tax relief on the transfer of assets to the CMT, stamp duty may also be payable on the transfer.

CMT are not for everyone, but when used correctly can provide significant financial benefits. At Cosgriff Orchard Legal we can advise whether a CMT is suitable for your circumstances and guide you through the process of establishing a CMT.