tax rates for minors

Understanding and minimising tax rates for minors

30 Sep, 2016

It’s only natural that you would want to give your children a good start in life financially, so it’s important to know about tax rates for minors, which apply to money saved in their name and to anything they themselves earn.

 

Tax on income earned by children

If your child earns income through their efforts, for example with an after-school job, it’s classed as ‘excepted income’ and is taxed at general adult tax rates. Anything they earn up to a certain threshold (currently $18,200) will, therefore, be tax-free.

It’s a different story, however, for income received from investments in your child’s name. This is known as ‘eligible income’, and the following tax rates for minors apply:

 

Tax on eligible income for minors (2015–16)

Taxable income Tax on this income
$0–$416 Nil
$416–$1307 66c for each $1 over $416
$1307 and over 45% of total income

Source: © Australian Taxation Office for the Commonwealth of Australia.

 

You can see that children are in fact charged the highest marginal tax rate if their investments return over $416 a year. This may seem pretty unfair, but this system is in place to deter adults from transferring investments to their children’s names for tax avoidance reasons.

You should therefore carefully weigh up the pros and cons of opening an investment in your child’s name, especially if the annual returns are likely to exceed the tax-free threshold while your child is still under 18.

If your child receives a combination of excepted income and eligible income, ordinary tax rates will apply to the excepted income while any eligible income will be subject to the higher tax rates for minors.

Let’s take the example of 17-year-old Peter, who works a part-time job and also has some money saved from gifts he’s received over the years. Last year he earned $9430 at work and his savings generated interest of $716. The $9430 is classed as excepted income and falls within the tax-free earnings threshold of $18,200. However, the interest on his savings will be taxed at the special higher rates since it’s classed as eligible income.

 

Registering your child for tax purposes

You can request a tax file number (TFN) from the ATO for your child from birth. If you don’t supply your child’s bank or share registry with a TFN then 47% tax will be withheld on interest earnings over a threshold of $420, as well as on all unfranked dividends.

Children with assessable income below $416 do not need to lodge a tax return, but if they have had money withheld from an employer or investment body, they will need to complete a tax return in order to get some or all of the money returned to them.

 

Tax deductibles for children

If your child is employed while going to university or TAFE then they may be able to claim a deduction for expenses where there is a clear link to their course. It may be possible to claim any of the following expenses:

  • depreciation of assets (such as computers, desks and bookshelves) required for study
  • journals and periodicals
  • photocopying and printing costs
  • stationery
  • student union fees
  • textbooks
  • travel from work to place of study

Any tuition fees payable under HELP or any repayments of outstanding HELP debts would not be eligible for a tax deduction.

 

Determining ownership of a child’s funds

Money received from a child’s investment must be declared by the person who rightfully owns and controls the investment. This is the case even if your child’s name is on the account and you only use the money to benefit them.

Imagine Alison deposits $6,000 into an account for her son, who is 4. Alison is signatory to the account and regularly makes extra deposits, as well as occasional withdrawals to cover her son’s preschool expenses. Since Alison is in complete control of the account, the ATO would determine that the money belongs to her, not her son, and it should be declared on her tax return.

In another example, Simon opens a bank account for his daughter, a little accountant in the making, who decides to save all her money from Christmas and birthday presents, pocket money, and odd jobs around the house. His daughter is the only person to use the money in that account, so any interest earned would belong to her.

 

Summary of tax rates for minors:

  • Income earned by minors through work is classed as ‘excepted income’ and taxed at the general adult rates
  • Passive income, for example through investments, is taxed at a higher marginal rate for children
  • If you don’t supply a TFN to your child’s bank or investment provider, they will withhold 47% tax on interest earnings over $420 and your child will have to file a tax return in order to reclaim the tax
  • Children who work while studying may be able to claim a tax deduction on certain items linked to their studies
  • If funds held in a child’s name are rightfully owned and controlled by an adult, the funds belong to the adult for tax purposes
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