Does child support have tax implications? In particular, do child support payments received add to taxable income?
The answer is no. Child support does not count as taxable income. Furthermore, how much child support you receive appears to have no significant tax consequences in Australia.
Child support payments received can reduce Family Tax Benefit Part A. That’s perhaps the main financial disadvantage from receiving child support.
Let’s explore further why child support is not taxable income. I’ll also explain why, in some cases, payers may be advantaged by declaring child support paid.
Child Support is Just a Cash Transfer Between Parents
The way to think about about child support payments is that they’re simply cash transfers between parents.
Cash is essentially money after tax. In whatever way the funds were obtained, all deductions have already been claimed and any associated tax has been paid. The money is there, ready to be spent on things like rent, food and clothing.
It just so happens that, under a child support agreement or obligation, one parent gives the money to the other parent to do the spending.
Why You Might Think Child Support is Taxable Income
You might think child support is taxable income because payments such as JobSeeker, Parenting Payment and Austudy are taxable; they count as income. A full list of taxable Centrelink payments is shown here. Child support is different from these taxable government payments since the money comes from another person.
But child support payments can affect FTB Part A
Beyond a certain threshold, receiving child support does reduce the amount of Family Tax Benefit (FTB) Part A you receive however. This is effectively a penalty against the parents and children of separated families.
We reduce your FTB by 50 cents for every dollar of child support you receive over the threshold. We call this threshold the Maintenance Income Free Area. We apply these automatically.Services Australia
Services Australia provides an example where Sally is assessed to receive $5,000 in child support this financial year. Based on her income and other factors, Sally would also be entitled to receive $4,423.80 in FTB Part A. But the Government takes half of every dollar of child support above a threshold of $1,686.30. This reduces the amount of family tax benefit Sally receives by $1,656.85, from $4,423.80 down to $2,766.95.
If Australia had a system of deductions and liabilities for child support
If a different system were in place, child support payments received would count as income. You could have a system where (a) the payer claims payments as a deduction against their income and (b) the recipient has to declare child support as income.
This hypothetical arrangement would work out because the payer’s tax deduction cancels out the recipient’s higher reported income. The amount of tax collected by the Australian Taxation Office (ATO) would be about the same, around zero, unless the payer were in a higher tax bracket.
But we don’t have such a system in place, perhaps because it would (a) advantage payers to be able to deduct child support from their gross income (b) disadvantage receivers to have to declare more of their income and (c) reduce tax collection by the Australian Government since payers have higher incomes on average.
What About the Income Tax Return Form?
You may have noticed when you do your annual tax return in Australia that you’re asked to report Child support you paid. The ATO also required you to declare Child support your spouse paid in another question.
While child support received is not taxable income, could there be some deduction available for child support paid? If you’re a payer, could you claim a deduction?
The only information I can see about this relates to a few government welfare programs where you’re allowed to deduct child support payments from adjusted taxable income. How much child support you pay can affect family assistance payments, low income supplements and the Carer Allowance (Source: Services Australia).
It’s important to note that adjusted taxable income is very different from taxable income. The adjustments can be program specific and include all sorts of things that may not normally be considered in tax calculations.
Taxable Income Affects Child Support, Not the Reverse
The relationship between taxable income and child support can be explained fairly simply. The higher your taxable income, the less child support you receive or the more you pay. The starting point for Services Australia calculating child support is the taxable (or gross) income of each parent.
Taxable income strongly affects child support in fact. With 50/50 parenting, for example, you can have large child support payments if one parent earns significantly more than the other.
Services Australia also have an adjusted income concept, where they fiddle around with the basic income measure. They deduct a self-support amount for all parents. Services Australia also adds in things like reportable superannuation contributions, preventing parents from switching employment compensation to non-taxable forms.
While income affects child support, the reverse doesn’t really apply. How much you receive or pay in child support doesn’t impact on your reportable income. The ATO treats child support payments as if the parents were still together and sharing their after-tax income for the benefit of the kid(s).
The bottom line is that you can relax about child support payments when it comes to doing your annual tax return. Child support received is not included in taxable income. Payments made are also not part of the income tax calculation, although they may affect your eligibility for certain welfare programs or the amounts you receive from them.