Tax on Children’s Income

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There are special taxation rules for minors who receive income. The rules were introduced to prevent adults from splitting their income with their children.

Some minors are not affected by the penalty tax rates, such as those fully employed, have a carer allowance, disability support pension, rehabilitation allowance, are permanently blind, are not living with their parents any longer, or are an orphan.

There are also some particular classes of income, called ‘excepted income’ that are not affected by penalty tax rates, such as reasonable wages, income from a will, or a legal settlement resulting from a divorce.

Ordinarily, investment income earned by minors less than $416 is tax free.  The tax liability for income above $416 is 66%. If the unearned income exceeds $1307, then tax is paid at the highest marginal tax rate.

Interest on a childs bank account that has been established and contributed to by relatives is also normally taxed at the higher prescribed rates TD 93/148.

However, who pays tax also depends on who's money it is. Is it the child's or the parents money in the child's name? The parents in some instances are taxed on their children's bank accounts at their marginal rates http://law.ato.gov.au/atolaw/view.htm?DocID=ITR/IT2486/NAT/ATO/00001

Example 1

A minor, living with his parents in Caulfield, received only a trust distribution of $350 from his parents family trust. As the income was less than $416, no tax is payable.

Example 2

A minor, residing in Malvern, received investment income on a bank account setup by his parents for the child's education, of $2000 in the 2014-15 year. As the income is not ‘excepted income’ the tax is calculated as: $2000 x 45% = $900.

Sources: Tax Payers Australia 2014 & 2015 Tax Summary

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Disclaimer:

Hillyer Riches Management Pty Ltd is a Corporate Authorised Representative (No 466483) of Capstone Financial Planning Pty Ltd. ABN 24 093 733 969. AFSL / ACL No. 223135.This document contains general advice only and is not personal financial or investment advice. Also, changes in legislation may occur frequently. We recommend that our formal advice be obtained before acting on the basis of this information.

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