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Disclaimer

This is not advice. Items herein are general comments only and do not constitute or convey advice per se. The information contained in these articles is for guidance only and should not be relied upon without obtaining professional advice having regard to your direct circumstances.

 

Tax on Childrens Unearned Income

Minors are classified by the Tax Office as children up to the age of 18 who are not working full-time. Special rules apply to the tax on income of minors, in particular their unearned income, that is, income from savings and investments rather than work. Some of this income may be liable for penalty tax rates of up to 66%.

A minor’s unearned income is taxed at a higher rate than earned or excepted income in an effort to discourage adults from diverting their income to children and accessing the lower marginal tax rates multiple times.

In the 2009-2010 tax year a minor could earn up to $3001 in unearned income before they would be liable to pay tax. In the current financial year this amount has been increased to $3333 in unearned income. This is due to the increase in the low income offset from $1350 to $1500. Minors do not need to lodge a tax return to claim the low income offset.

Tax rates applicable to unearned income for minors who are Australian residents are:

Unearned Income

Tax Rates

$0 - $416

Nil

$417 - $1307

66% on each dollar above $416

Over $1308

45% on each dollar above $1307

Due to these higher tax rates, if a minor earns more than $3333 in unearned income it may be better to hold the investments in the name of the parent on the lowest marginal tax rate. If an adult holds an account or investment fund as trustee for a minor then any interest or dividend income should be included on the adult’s tax return.

If an investment is held in a child’s name, he or she should have a tax file number and quote this to their bank or investment body to avoid having PAYG tax of 46.5% withheld from their interest earnings. If a child has had PAYG tax deducted they will need to lodge a tax return to claim it back from the ATO and they will need a tax file number in order to lodge a return.

Those children who do work will be taxed at ordinary marginal rates on their excepted income with the $6000 tax free threshold. Excepted income includes:

• Employment income
• Taxable pensions or payments from Centrelink
• Income from a deceased person’s estate
• Income from property transferred to the minor as a result of the death of another person or family breakdown
• Income in the form of damages for an injury they suffer
• Income from their own business
• Income from a partnership in which they were an active partner
• Compensation, superannuation or pension fund benefits
• Net capital gains from the disposal of any property or investments listed above
• Income from the investment of any of the amounts listed above

 


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