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Any income that has been earned by your child's efforts, such as wages from an after-school job, is considered ‘excepted income' and is taxed at the general adult tax rates regardless of whether your child is under 18. However, you should be cautious when putting investments in your child's name because minors do not enjoy the same tax-free thresholds as adults on this type of income, known as ‘eligible income'. Table 1.2 sets out the tax rates that apply to minors' eligible income.

Table 1.2: tax on eligible income for minors (2017–18)

source: Australian Taxation Office for the Commonwealth of Australia.

PITFALL

Minors under the age of 18 are taxed at the highest marginal tax rate for ‘eligible income' (such as interest, dividends and trust distributions) over $416 per annum.

If some of your child's income is excepted income and the rest is eligible income, they will pay ordinary rates on the excepted income and pay at the higher rate on the eligible income.

EXAMPLE

Louie is 17 on 30 June. He earned $8780 from a part-time job. He also received $920 in interest from money he had saved over the years from gifts. Therefore, he has an excepted income of $8780 and is entitled to the tax-free threshold of $18 200 for this income. He also has eligible income of $920 interest, which is taxed at the special higher rates.

A child is eligible from birth for a TFN from the ATO. If your child is under 16 (at the start of the calendar year) and does not supply their TFN to the bank or share registry, then 45 per cent tax will be withheld on interest earnings over a threshold of $420 as well as on all unfranked dividends. If your child is aged 16 and over, then the threshold is reduced to $120.

Children do not need to lodge a tax return if their assessable income is less than $416. However, if tax has been withheld from them by an investment body or employer, then they must lodge a return in order to get that money returned to them.

TIP

If you have an adult child who has a job while going to university or TAFE then they may be able to claim a deduction for certain expenses if there is a sufficient connection between their course and their assessable income. Some expenses that they might be able to claim in this instance include:

•depreciation of assets (such as computers, desks and bookshelves) used for studying purposes

•journals and periodicals

•photocopying and printing costs

•stationery

•textbooks

•travel from work to place of study.

They wouldn't be entitled to a deduction for any tuition fees payable under HELP or any repayments of outstanding HELP debts.

Earnings from a child's investments must be declared by the person who rightfully owns and controls the investment, not the person whose name it is in, or whose name it is held in trust for. This is regardless of whether the money is spent on resources for the child.

EXAMPLE

Sarah opens an account for her three-year-old daughter, Samantha, by depositing $8000. Sarah is signatory to the account and she also makes regular deposits and withdrawals to pay for Samantha's preschool expenses. The ATO would deem that the money belongs to Sarah and any interest earned from this account must be declared for tax by her.

If the funds in the account are made up of money received as birthday or Christmas presents, pocket money or savings from part-time earnings such as newspaper rounds, and these funds are not used by any person other than the child, then the interest earned is the child's income.

PITFALL

Children are not eligible for the low-income tax offset against unearned income, such as interest. The rebate can only be offset against excepted income.