Taxation of Under 18 Income (Minors Income)

For Australian income tax purposes, a minor is generally a person who is under 18 years of age on 30 June at the end of the financial year. Special tax rules apply to many minors to discourage adults from transferring investment income into a child's name to reduce tax.

The Australian Taxation Office (ATO) generally classifies a minor's income into two categories:

• Excepted Income – taxed at normal adult tax rates.

• Eligible Income (also known as unearned income) – taxed at higher rates once it exceeds a low tax-free threshold.

 Eligible Income (Unearned Income)

Eligible income is income that has not been earned through the minor's own personal efforts. This type of income is subject to special higher tax rates.

Examples of eligible income include:

- Interest from bank accounts - Dividends from shares

- Trust distributions - Investment income

- Rental income from investments - Royalties in some circumstances

Tax Rates for Eligible Income

Taxable Eligible Income Tax Payable

$0 – $416 Nil

$417 – $1,307 66 cents for every $1 over $416

$1,307 and over 45% of the total eligible income

Unlike adults, minors generally cannot claim the normal tax-free threshold ($18,200) against eligible income.  These higher tax rates are designed to discourage income splitting by parents or other family members.

 Excepted Income (Earned Income)

Excepted income is income that a minor earns through their own work or personal efforts. This income is taxed in the same way as an adult's income.

Examples include:

• Wages and salary from part-time or casual employment

• Apprenticeship income

• Income from running a business

• Income from professional services

• Certain compensation payments

• Income earned after permanently leaving full-time education and working full-time

A minor receiving only excepted income can generally claim the normal tax-free threshold and other tax offsets available to Australian residents.

Example:

Mary is 16 years old and she is a full-time student.  During the financial year she earns:

• $8,000 from a part-time job and $500 interest from her savings account.

Employment Income

The $8,000 earned from her part-time job is excepted income because it was earned through her own efforts.

As this amount is below the adult tax-free threshold, Mary would generally not pay any income tax on her employment income (although any tax withheld by her employer may be refunded after lodging her tax return).

Interest Income

The $500 interest is eligible income because it is investment income.

Only the first $416 is tax free under the minor income rules.

Tax payable:

$500 − $416 = $84

$84 × 66% = $55.44 tax

Therefore, Mary's interest income is taxed separately under the higher minor tax rates.

Children's Savings Accounts

Special withholding rules apply to interest earned on children's savings accounts.

- Interest under $120: If a child earns less than $120 interest during the financial year, the financial institution will generally not withhold tax.

- Interest between $120 and $420: If the child is under 16 and earns between $120 and $420 in interest:

• If they provide either their date of birth or a Tax File Number (TFN), no tax will generally be withheld.

• If neither is provided, the financial institution may withhold tax. A tax return can then be lodged to claim a refund if appropriate.

- Interest of $420 or more: If the child is under 16 and earns $420 or more in interest:

Providing a TFN generally prevents tax from being withheld by the financial institution.

If no TFN is provided, tax may be withheld and a tax return may need to be lodged to claim any refund.

It is important to note that whether tax is withheld by the bank is different from whether tax is actually payable. The final tax liability is determined when the child's tax return is assessed.

Lodging a Tax Return

A minor may need to lodge a tax return if they:

• had tax withheld from employment income;

• had tax withheld from bank interest;

• earned eligible income above the tax-free threshold for minors;

• are required by the ATO to lodge a return.

If tax has been withheld and a refund is expected, the child will need a Tax File Number (TFN) before a tax return can be lodged on their behalf.

Important Points to Remember

• Income earned through a child's own work is generally taxed using normal adult tax rates.

• Investment income received by most minors is taxed under special higher tax rates.

• The purpose of the higher tax rates is to prevent income splitting between adults and children.

• Banks may withhold tax if the child does not provide their TFN or required identification.

• A child can still be required to lodge a tax return even if they ultimately have no tax to pay.

• Different rules may apply to certain excepted persons, such as minors with disabilities, minors who receive income because of the death of a parent, or minors who are no longer financially dependent on their parents.