It is an unfortunate fact that child support is a key financial responsibility when parents separate or divorce. Normally one parent has their children more often than the other one. It is only natural that parents want to know how child support will affect them at tax time.
What child support is
Child support is what one parent pays to the other parent to contribute financially to their children’s needs. Services Australia (Child Support) manages it under the Child Support (Assessment) Act 1989. However, you can manage support payments without involving Services Australia but it is wise to keep good records.
The formula used to base child support payments on is as follows:
1. The taxable income of both parents.
2. How many and how old the children are.
3. How often each parent cares for the children.
Is it taxable or a tax deduction
It is neither taxable or claimable as a tax deduction.
If you receive child support, you do not need to declare it as taxable income. This means there is no reduction in the amount of money you receive for your children.
When you pay child support, you cannot claim it as a tax deduction as the tax office considers it a personal obligation unrelated to work.
But child support can indirectly affect your taxes.
What are the tax implications?
Paying or receiving child support has other tax implications, including:
1. Adjusted Taxable Income. The tax office uses Adjusted Taxable Income (ATI) to evaluate whether you qualify for government offsets and benefits. So if you pay child support, it reduces your ATI and this may affect whether you get the parenting payment, Family Tax Benefit (FTB) Part A or other government benefits.
2. Family Tax Benefits. If you receive child support, it may reduce your FTB. However, this depends on how much child support you receive. The more you get, the less government support you may be eligible for.
3. Making private arrangements. If you make private child support arrangements for your children when you separate from your partner, this can affect how the government assesses any benefits to which you are entitled. But it is still not taxable or claimable as a tax deduction.
Keep good records
It is important to keep good records if you receive or pay child support. Keep payment records such as receipts, payment transfers and statements from Services Australia. This will help if you receive a legal challenge and gives you accurate information for government departments assessing your eligibility for benefits.