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When a couple separates, decisions relating to the care arrangements of children becomes a primary issue. The amount of child support payable is heavily influenced by both parent’s respective care of the children.
Understanding Child Support: Impacts on Finances and Borrowing Capacity
26 April 2023
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3 minute read
Child support payments also have an impact on an individual’s personal finances, their credit score and borrowing capacity. Family Lawyers can assist individuals to understand what child support payments are, and how these are assessed.
How is child support determined:
Child Support payments are based on the Child Support (Assessment) Act 1989, which outlines the amount of child support payable by the non-primary parent, to the primary parent.
The formula works by determining each parent’s percentage of care, alongside the following considerations:
- The ages of the children: It is generally considered that older children require more financial support than younger children.
- The incomes of both parents: the amount of child support payable may be influenced by the income levels of both parents. For example, if one parent has a significantly higher income than the other then they may be required to pay a larger percentage of their income in child support.
- The amount of time each parent spends caring for the child/ren: The amount of time that each parent spends with the child/ren will affect the child support payable. If one parent has primary care of the children, then they will generally receive more child support.
- Special circumstances: There may be special circumstances which affect the amount of child support payable, for instance if the children have special medical needs or expenses.
Are child support payments taxable?
Child support payments are not considered taxable income, and in the same respect, they cannot be considered tax-deductible for the paying parent.
However, any income earned from investing child support payments will be subject to tax. In other words, if a parent invests child support payments and receives an income as a result of that investment, then the income earned is liable to tax. It is also important to note that if child support payments are paid through a private agreement rather than through the Child Support Agency, both the payer and recipient may be subject to tax implications.
Child Support Payments and borrowing capacity:
It is important to note that child support payments can also impact an individual’s borrowing capacity when applying for personal loans or mortgages.
When assessing borrowing capacity, lenders will consider the individual’s income and expenses. Child support payments are considered an expense which means that it will reduce the amount an individual has available to finance loan repayments, which may in turn impact their borrowing capacity.
Impact on credit score:
Parents who are liable to pay child support must be aware that failure to pay child support will negatively impact on their credit score, and may also result in the Department of Human Services contacting your employer to deduct amounts from your pay.
Missed child support payments can also make it difficult for individuals to obtain credit in the future. This will have a direct impact on their eligibility for loans, credit cards and other financial products.
If a person does not have an income, are they still be eligible to pay child support?
The child support assessment takes into consideration all sources of an individuals income, for instance any income derived from self-employment, investment income or government benefits.
In circumstances where a parent has sufficient savings or superannuation then this may also be taken into account when calculating child support payments. This is because the assessment also considers investment income earned through superannuation, and interest earned on savings.
The child support agency may also consider an individual’s assets if they have reason to believe that the person is not reporting their income accurately. This is because it is accepted that both parents are responsible for the financial upbringing of their children.
It's crucial that individuals understand the financial impacts associated with child support payments to enable them to make informed decisions concerning their future expenses and investments.
Working together, family lawyers and accountants can equip clients with the necessary knowledge to plan for their financial future.
If you want to book in a free, short confidential chat about a particular matter, please get in touch by clicking here.
Author: Hayder Shkara is the principal of Justice Family Lawyers and Melbourne Family Lawyers. His team has vast experience in family law, including financial and property settlements, divorce, child custody matters, wills and estate, avo lawyers, consent orders and binding financial agreements.
