Child Maintenance Trusts After TR 98/4

by David Castle, Barker Gosling

Released July 1998


A child maintenance trust ("CMT") allows maintenance payments to be made in a tax effective manner.

Since 1 July 1979, trust income distributed to children has been tax disadvantaged. The tax free threshold is reduced from $5,400.00 to $416.00 and marginal rates apply of up to 66%. Annexure "A" compares standard tax rates with children's tax rates.

A CMT which complies with s102AG of the Tax Act produces "excepted trust income" which bears normal adult tax rates.

The (sometimes dramatic) savings that can be made by use of a CMT are illustrated by Annexure "B".


A CMT must comply with s102AG(2)(c)(viii).

The essential elements are:

Family breakdown is very widely defined in s102AGA.

There are three anti­avoidance provisions:

Ss.(2A) provides that there will be no excepted trust income "unless the beneficiary of the trust concerned will, under the terms of the trust, acquire the trust property when the trust ends".

Ss.(3) provides that where the parties to the derivation of excepted trust income "were not dealing with each other at arms length in relation to the derivation", the excepted trust income is limited to "only so much (if any) of that income as would have been derived if they had been dealing with each other at arms length in relation to the derivation ...".

Ss.(4) denies the status of excepted trust income to income derived by the trustee as the result of an agreement entered into for a purpose that included the purpose "that that assessable income would be excepted trust income".


The trust is formed in the usual way.

A fixed trust for the child or children to be benefited (or a separate trust for each such child) will clearly qualify, if sufficient assets are acquired by the trust to enable sufficient income, on an arms length basis, to be generated to satisfy the maintenance requirements.

However this involves the paying parent tying up substantial assets and investing them for the sole benefit of the subject children at age 18 or 21 or later - but subject to the capital vesting in the estate of that child or those children on earlier death.

Most parents cannot afford the luxury of a dedicated fixed trust for one or more specific children ­ to the exclusion of the spouse, other children and other family members.

Most divorced parents either remarry, and/or have other children and/or want to benefit their spouse on earlier death.

Thus most people require as much flexibility as possible in the provisions of the CMT, to cater for such contingencies.

It may be that CMTs were "abused' prior to 1994. The ATO certainly thinks so - see in particular paragraph 22 of Ruling TR98/4 (the New Ruling).

I will discuss (in D below) the ongoing tension between the desires of taxpayer parents to retain flexibility and the ATO campaign to avoid "abuse of the system".


Division 6AA was introduced on 1 July 1979 - containing the exception for, inter alia, CMT.

Draft Ruling TR94/D8 (the Draft Ruling) was issued on 24 February 1994.

Act No. 181 of 1994 ("the New Act") came into effect on 19 December 1994. This introduced the anti avoidance provisions and changed the wording of the relevant sections. It had some retrospective effect.

The New Ruling was released on 18 March 1998 and has immediate effect.

The New Ruling

It is much longer than the Draft Ruling, having grown from 7 pages of 31 paragraphs to 28 pages of 91 paragraphs.

It spells out in more detail the history and background of the CMT.

Fixed or Discretionary Trust

Of main interest is the requirement for the assets of the CMT to be held exclusively for the subject children.

This appears in paragraphs 33 to 45. Not only must the child acquire the trust property when the trust ends but "the property must pass into the child's estate, should the child die before the trust ends" (paragraph 33).

This is taking a very hard line and is arguably not supported by the section itself - particularly as it virtually ignores ss102AG(8).

The Ruling puts up various alternative views, for the purpose of demolishing each of them.

Alternative view 2 (paras 42 and 43) raises the argument that "ss102AG(8) supports the view that the law did not require property transferred to a trustee to be beneficially that of the child. This is on the basis that the provision takes property to be transferred for the benefit of beneficiaries, where their entitlement to the income from the property is subject to a discretion".

The Ruling then purports to demolish that argument on the basis that subsection (8) was inserted only to allow some discretion in relation to the allocation of income and that it is an apportioning provision. These ATO arguments are far from convincing. Subsection (8) states that property transferred to a discretionary trust is nonetheless "property transferred to the trustee for the benefit of the beneficiary", despite what the Ruling says.

Alternative view 3, (para 44) states that while the ATO hardline in relation to beneficial entitlement is not supported by AAT Case 44/95, the AAT was not referred to detailed arguments and that "it would be appropriate to have this issue tested in a case where the competing arguments could be squarely put to a court. Consideration would be given to assisting a litigant in such a case under the Test Case Litigation Programme For Tax Law Clarification, Administered By The ATO". That is a real admission of doubt by the ATO.

Thus the ATO hardline view on the necessity for the CMT to be a fixed trust for the benefit of the subject children only, is not beyond doubt.

For subsection (8) to be given effect, the trustee may have a discretion in relation to income distributions. Thus it is arguable that income distributions from a CMT can be discretionary.

It is also arguable that subsection (8) permits property to be transferred to the trustee of a discretionary trust as it is deemed by that subsection "to have been transferred to the trustee for the benefit of each of those specified beneficiaries or for each of the beneficiaries in that specified class of beneficiaries, as the case may be".

It is also significant that subsection (8) uses similar language to Section 101 of the 1936 Act. Section 101 is the charter for enabling discretionary objects of a discretionary trust deemed to be presently entitled to the income of the trust estate. Subsection (8) appears to be a charter for deeming property transferred to a discretionary trust to be property transferred to the trustee for the benefit of the beneficiary in accordance with subsection 102AG(2)(c).

However, sufficient property must be transferred to the CMT to enable an arm's length rate of income to be earned by the trustee and distributed to the relevant beneficiaries.

We must now decide in relation to each CMT whether the ATO hardline in requiring a fixed trust for the relevant beneficiaries or their estates is supported by law and therefore must be followed, or whether it is open to challenge.

If we follow the ATO view, then a CMT will only be of use to those wealthy non­custodial parents who can afford to tie up significant assets for the benefit of the relevant children only - to the exclusion of other children, future children, children of subsequent marriage and widows or widowers. Surely this was not intended by the legislature.

But if the subsection (8) argument is valid, then the CMT can be designed primarily for the subject children, until they die or reach the age of 18, but permit income and capital distributions to other family members when the maintenance obligations cease either on death or adulthood. While this is my preferred view, prudence may dictate that the ATO view is followed.

However, in further support of my view, is the fact that the "excepted trust income" is assessed on an annual basis and that that the requirements of ss102AG(2)(c)(viii) are satisfied in any year in which the necessary amount of maintenance is paid to the subject children as the result of a family breakdown - regardless of what happens to capital and income distributions in subsequent years. Of course the CMT must still comply with the requirement that the trust property be held by the trustee for the benefit of the beneficiary (ss102 AG (2)(c)) and that the beneficiary will, under the terms of the trust, acquire the trust property when the trust ends (ss102 AG (2A)).

It is arguable that these requirements need only be satisfied in the years in which excepted trust income is derived.

In subsequent years, the concept of "excepted trust income" becomes irrelevant.

Thus, provided all tests of the CMT regime are met in the years in which excepted trust income is claimed, it should not concern the ATO if the Trust Deed allows discretions for gifts over of both capital and income on the death of any subject child or on any subject child reaching the age of 18.



Taxable Income


Marginal Rate


Marginal Rate


* applies to whole income with no zero rating




Individual pays maintenance for 3 children

Individual has taxable income of $35,000


Direct payment - after tax

Payment via discretionary tax

Payment via maintenance trust

Weekly Payments
Weekly Cost
Weekly Cost
Weekly Cost


  1. What is a child maintenance trust?
  2. For the income of a child maintenance trust to be tax effective, what elements must be present?
  3. Can a discretionary trust be used as a child maintenance trust?
  4. For a child maintenance trust to be tax effective, what connection must the assets of the trust have with the beneficiaries?
  5. Does TR 98/4 permit distributions from a trust to a child maintenance trust via a unit trust in which the child maintenance trust has units?
  6. In what situations is a child maintenance trust still tax effective?