If you’re considering bankruptcy, it’s important to understand how bankruptcy and child support interact.
Child Support for beginners
The department of human services (DHS) administer the child support assessment scheme in Australia.
In order for the DHS to manage and work with separated parents on child support assessments, parents need to ensure that they;
- Tell the DHS of any changes in circumstances
- Provide information that will aid the DHS in calculating child support payments
How are child support payments calculated?
Generally speaking, your child support obligations will be determined by your income and your care percentage of the children involved.
The DHS will use your last available tax return to determine your expected income for the upcoming assessment period. That’s why it’s important to make sure that your tax returns are up to date.
Otherwise, you run the risk of having to make payments above your actual obligations.
Or worse, you may be incurring a significant child support debt!
What if my income changes before tax time?
You should notify the DHS of any changes in your circumstances. If your income changes before a new tax assessment is available, you still have options.
You can request that the DHS use an estimate of your adjusted taxable income to calculate your obligations.
Generally speaking, this will only be successful if;
- The existing payments are already based on an adjusted income from your tax return or other advice of your adjusted taxable income and;
- Your current adjusted income is at least 15% less than the income that is being used in your current assessment
Bankruptcy and Child Support debt
While bankruptcy covers many debts, child support isn’t one of them. While the child support debt is provable, you’re not released from it in bankruptcy.
So if you owe a large amount of child support, you’re best to communicate with the DHS. That way, you can come to an arrangement to pay the debt. Alternatively, you can take steps to dispute the debt if you don’t think the assessment is correct.
But that isn’t where the story ends for bankruptcy and child support. If you’re paying ongoing child support, you definitely want to keep reading.
Bankruptcy and Child Support payments
If you earn above a certain amount (we call it an income threshold), you can afford to contribute some of your income towards your bankrupt estate.
Your income over the relevant threshold can be varied by factors like dependants, child support, fringe benefits, income tax, and salary packaging.
The below table shows the relevant threshold limits as of March 2019:
Threshold Guide | Threshold Amount |
Actual Income Threshold – If you have no dependants | $57,866.90 |
Actual Income Threshold with 1 dependant | $68,282.94 |
Actual Income Threshold with 2 dependants | $73,490.96 |
Actual Income Threshold with 3 dependants | $76,384.31 |
Actual Income Threshold with 4 dependants | $77,541.65 |
Actual Income Threshold with more than 4 dependants | $78,698.98 |
In order for someone to be a dependant, they must live with you most of the time and earn less than a set limit each year. The existing limit is $3,642 per annum.
How do you calculate income contributions in bankruptcy?
In it’s simplest form, the maths is (your assessable income – the relevant threshold) ÷ 2
The formula means you’ll pay half of what you earn above the relevant threshold.
Let’s look at a basic example. It won’t include child support payments but we’ll get to that in a moment, promise.
Let’s say you’re earning around $110,000 gross taxable per year. Based on that, you’d be liable to pay around $30,500 in taxes. This would leave you with an after tax (or net) income of around $79,438.
For the sake of this example, let’s assume there are no other components to your income like salary sacrifice or fringe benefits. Let’s also say that you currently have no dependants.
Here’s how the trustee may calculate your bankruptcy payments:
Gross Taxable Income: | $110,000.00 |
Less Tax Payable: | $30,500.00 |
= Assessable Income: | $79,500.00 |
Less the threshold for no dependants | $57,866.90 |
= Excess above the threshold: | $21,633.10 |
Amount payable per year (Excess ÷ 2): | $10,816.55 |
Based on the above, you’d need to make payments of around $901.38 to your trustee each month ($10,816.55 ÷ 12).
Building on this example, let’s say need to pay around $15,000 in child support.
After giving the trustee a copy of your child support assessment, your contribution liability in bankruptcy may change to this:
Gross Taxable Income: | $110,000.00 |
Less Tax Payable: | $30,500.00 |
Less Child Support Payable: | $15,000.00 |
= Assessable Income: | $64,500.00 |
Less the threshold for no dependants | $57,866.90 |
= Excess above the threshold: | $6,633.10 |
Amount payable per year (Excess ÷ 2): | $3,316.55 |
Based on the above, you’d need to make payments of around $276.38 to your trustee each month ($3,316.55 ÷ 12).
As you can see, your child support obligations will lower your bankruptcy contributions.
Will I need a formal child support assessment for the trustee to take my child support payments into account?
Yep.
Otherwise, we could all place our fingers to the wind and decide how much child support we should or shouldn’t pay. That doesn’t sound right, does it?
If you have outstanding tax returns that are impacting the accuracy of your child support assessment – lodge them ASAP!
If the fear of owing a tax debt has stopped you from lodging your returns, don’t worry. The tax debt will be covered in bankruptcy.
Where do I go from here?
If you’re considering bankruptcy and pay child support, you’ll want a better idea of what you’d need to pay, right? Don’t sweat it – that’s where we come in.
As one of Australia’s largest and leading registered bankruptcy trustee firms, we can give you a better idea of what you’ll need to pay.
So if you need some advice on bankruptcy and child support or want to get the ball rolling, get in touch now.
Start a chat, call us on 1300 369 168 or make an online enquiry