Minors special tax rates

To stop people from splitting their income into their children's names and thus potentially being able to take advantage of quite a few $6,000 tax free thresholds, minors are given special tax rates on "unearned" income. Once their income exceeds $416 each, special marginal tax rates apply such that the entire amount is taxed at 47%.

Minors for tax purposes are those under age 18 at the end of a financial year. Under Division 6AA of Part III of the Income Tax Assessment Act 1936, if income satisfies the definition of eligible assessable income, then the taxable income that flows from this is taxed at 47% when it exceeds $416. This small amount represents a tax-free threshold. Special rules also apply on the assessment of capital gains.

The tax rates are as follows:
$0 to $416 = NIL
$417 to $1445 = NIL + 66c for every $1 over $416
$1446 and over = 47% flat rate on the entire amount

(Note: for non-resident minors, the 47% flat rate kicks in from $811)

In addition, minors are entitled to a low income tax rebate if their income is below the threshold for that rebate and hence can get $416 tax free, then the next $150 of tax is rebated, meaning that they can earn an additional $226 before they start really paying any tax.

These rates are designed so any child earning more than $642 ends up paying a flat 47% on the entire amount. For example:

Child gets $1,000 in interest from a bank account that really contains her parent's money but is in her name for tax purposes.

Tax payable on first $416 = nil.
Tax payable on next $584 = $385
Minus $150 low income tax rebate, total tax paid = $235. So this child pays an average tax rate of 23.5%

If a child receives $3,000, the tax paid will be:
First $416 = nil.
Next $1,029 = $679 (66%)
Next $1,555 = $731 (47%)
So total tax payable = $1,410, minus a $150 low income tax rebate = $1,260, for an average tax rate of 42%. Without the $150 tax rebate the tax rate would be 47%, and this will be the tax rate for any amount of income over $1,446.

Because of the effect of the Low Income Tax Rebate, the minimum tax free threshold for a minor on unearned income is effectively $642.

Income that is treated as unearned income is called eligible assessable income. It mainly applies to contrived arrangements of splitting up the family business income or investing in your children's names. The sorts of income that are not eligible assessable income (ie, the minor gets adult tax rates include:

Anything else, namely any arrangement where the parent invests in the child's name or someone is contriving a dodgy income split is treated as eligible income and is treated to the punitive tax rates.

Ways to get around these tax rates

There are only limited ways to invest in a tax efficient manner in a child's name. Generally if you are looking at an investment that is going to generate any significant income or capital gains it would be better to invest in the name of an adult, unless that adult was already on the highest marginal tax rate in which case it hardly matters (except in that case you might invest in a child's name anyway perhaps to dodge superannuation surcharge or to protect assets from creditors or other reasons along those lines).

There are some major concessions available for minors receiving superannuation death benefits from a deceased on whom the minor was dependent. Lump sums up to the deceased's pension RBL may be tax free and 15% tax rebates apply to assessable income paid from pensions or ETP annuities resulting from the death or permanent disability of another person, and these monies are usually taxed at normal adult tax rates.

Investment Bonds

Depending on the product provider's policy toward minors, tax-paid investment bonds from insurance companies can be an effective investment for putting money into the name of a minor.

Investment bonds are fully taxed in the hands of the insurer, subject to rules regarding holding periods, no further tax needs to be paid by investors in these. This of course is handy for children, there are no special rules that levy extra taxes on minors holding these bonds so effectively the child gets the same tax treatment as an adult.

There are age restrictions on children being able to own a life insurance policy (including an investment bond), they are as follows:

Parents and grandparents can also own a bond for the benefit of a child.

Times when minors tax rates don't apply

Exemptions:

Please note that the rules are different for non-resident children, I definitely will have to defer that one to your own specialist tax adviser.