Child support and super contributions

In my column last week, I answered a question from a subscriber who had withdrawn approximately $83,000 from their superannuation fund, which was to be used as a deposit for an investment property in the super fund. However, the property was eventually put into the names of the individual members.

Given the amount withdrawn could no longer be categorised as an investment in the super fund, and because the member had met a condition of release, they were faced with the dilemma of how to classify the lump sum withdrawal. Their choices were either to take it as a lump sum payment, or as a lump sum pension payment.

The problem for the member is that they still have a child support liability and were worried about the potential effect of classing the lump sum as a pension payment, as it would be deemed to be income. Unfortunately, in my answer I had forgotten the complexities surrounding the child support system, and how something which may not be subject to income tax can still be considered income by the child support agency.

This subscriber's experience is further evidence of how the current child support system needs to be overhauled. On one hand, you have people with a moral and legal liability to support their children and try to avoid this by working for cash or just never lodging income tax returns.

I know of one case in which a divorced father avoided his child support liability by working for cash and by failing to lodge income tax returns for seven years. Had he not met the new love of his life in Bali, he may never have paid any child support.

As part of his new wife's visa application, he found that he needed to lodge his outstanding income tax returns. Upon meeting this requirement, justice was served as his ex-wife received a substantial back payment for child support that had never been paid up to that point.

On the other hand, there are some who accept their responsibility to pay child support, but end up paying more than is fair or equitable. This subscriber's question is a good example of where the child support system is not fair to someone who does pay the required amount.

In my answer, I confused the fact that lump sum superannuation payments are not taxable for someone under 60, up to a limit. I had mistakenly said that taking the $83,000 as a lump sum – which is below the tax threshold for people under 60 – should not result in an increased child support payment.

I had forgotten that the child support agency uses a different calculation method to assess a parent's child support commitment. The amount used to assess a parent's liability is based on their taxable income each year, after taking into account and adding back such items as reportable fringe benefits, total net investment losses and reportable superannuation contributions.

This means that although the $83,000 lump sum would not be taxable, the tax payer receiving a tax offset to the value of the tax payable on the lump sum would mean the $83,000 is counted as taxable income. So in this case, classing the $83,000 taken as a lump sum would not have been taxable, but would have resulted in the subscriber's child support liability increasing for that year.

This is unfair because at the time a property settlement is reached, all assets of a couple are taken into account, including any superannuation. As a result, when working out how much of the joint marital assets they would retain, their superannuation would have been counted as an asset, and therefore the amount paid to their spouse would have been increased by their share of the superannuation.

For the subscriber to then have a superannuation lump sum payment classed as income, which results in a greater amount of child support being payable, the ex-spouse gets two bites of the superannuation cherry.

There are in fact a number of alternatives when it comes to allocating the $83,000, some of which would result in a much lower child support liability. The problem is that each option would result in some income tax payable. It is therefore important that the subscriber seek professional advice to work out which alternative minimises the income tax and child support liability payable.

Question: I feel that there may be a danger in your limited answer to the question about someone in their early 50s, who is no longer employed that has income from investments making the maximum $25,000 personal deductible superannuation contribution.

I believe a problem can arise if there is not sufficient income and the amount contributed would result in a loss. In this situation if the person making the maximum deductible concessional contribution also made the maximum non-concessional contribution, it could result in them exceeding the non-concessional limit.  I got caught like this last financial year and the notice ‘Excess Non-Concessional Contributions' was a pain to process.

Answer: Your question highlights an important strategy step I have mentioned in many of my answers relating to personal deductible super contributions. Before making a deductible personal super contribution, a person should first estimate what their taxable income will be in the year before making the contribution.

Where the contribution will reduce the member's income below a point at which no income tax is payable – approximately $20,500 for someone under 65 – the benefit of the contribution is lost and creates a cost for the 15 per cent contributions tax with no change in personal income tax. Furthermore, it makes even less sense to make a tax-deductible contribution resulting in a tax loss.

If you have a question for Max Newnham please email it directly to max@taxbiz.com.au