Minors and tax

Everyone who earns an income needs to pay tax, even teenagers – whether delivering papers, pizzas or working at the local supermarket. For minors (people under the age of 18) there are special tax rates that apply to any eligible income you earn. “Eligible” income includes any money you receive that you have not earned through your own hard work – for example, bank interest. It does not include money coming in from a job, which is taxed at normal rates.

However, you do not have to pay any tax if your eligible income is up to $416 a year. If it is more than $416 but less than $1,308, you will pay 66% for any amount in between, and if it’s $1,308 and over, you will pay 45% on the entire amount.

The tax rules for eligible youth income were introduced into the Australian taxation system to stop or discourage adults from dividing their income and putting some into their children’s name, (since the children would be on lower tax rates due to their lower incomes, and therefore pay less tax).

Eligible income prescribed tax rates (for resident minors)

Eligible income Resident prescribed tax rate applicable
0 – $416 nil
$417 – $1,307 66% for amount in excess of $416
$1,308 and over 45% on the entire amount
Note: In order to discourage income splitting, children under 18 years of age cannot access the low income tax offset (LITO) to reduce tax payable on their unearned income, such as dividends, interest, rent, royalties and other income from property.

Bank accounts for minors

Children may not be able to see over the counter at the bank, but they can have bank accounts. Some parents open saving accounts with banks soon after their child is born so they can deposit money and teach their child about money and saving.

Different financial institutions offer products tailored to children, however the interest these accounts earn is subject to tax. Interest on children’s bank accounts, or from investments in a child’s name, is taxed as children’s income where the investment, or money, was given (or gifted) to the child by parents, grandparents or other relatives.

As a result, it is regarded as “eligible” income, and will usually be subject to the special higher rates. Not all minors are affected by the special rules – there are some minors who fall under the category of “excepted persons”.

Excepted persons

You will not have to pay the higher tax rate, but you do pay the ordinary tax rates, if you are an “excepted person”.

For the year ended June 30, 2014, a minor is an excepted person if they were:

  • working full time, or had worked full time for three months or more in the 2013–14 income year (ignoring full-time work that was followed by full-time study), and
    • intending to work full time for all or a “substantial part” of the 2014–15 income year, and
    • not intending to study full time in the 2014–15 income year
  • entitled to a disability support pension or rehabilitation allowance, or someone was entitled to a carer allowance to care for them
  • permanently blind
  • disabled and were likely to suffer from that disability permanently or for an extended period
  • entitled to a double orphan pension and received little or no financial support from relatives
  • unable to work full-time because of a permanent mental or physical disability and received little or no financial support from relatives, or
  • the main beneficiary of a special disability trust.

Income not covered by the special rules

Even though a minor may not be an excepted person, ordinary rates of tax still apply to certain types of income. Such income is called excepted income.

Excepted income includes:

  • employment income
  • taxable pensions or payments from Centrelink or the Department of Veterans’ Affairs
  • compensation, superannuation or pension fund benefits
  • 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, or 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
  • net capital gains from the disposal of any property or investments listed above
  • income from the investment of any of the amounts listed above.

Excepted net income (that is, excepted income minus deductions relating to that income) is taxed at ordinary rates. The low income tax offset will only reduce tax payable on excepted net income.

All other income of a minor who is not an excepted person will be taxed at the higher rates. The low income tax offset will not reduce tax payable on this income.