Taxation for Minors

Tax for Minors, and We Don't Mean Iron Ore and Coal

If you're working and you're under 21 years of age you may already have encountered the rule that businesses don't always have to pay you the full adult wage. But did you know that you get also taxed differently when you're young?

‍

Woah!

Sadly you don't pay less tax to compensate you for the reduced salary. Instead, there are different tax rates for people under the age of 18, depending on your status as a person and the source of the income. These taxation rules can make it less attractive for people to put their investments in their children's names in order to reduce their own income tax.

‍

What does status mean?

If you're under 18 you can be considered an 'excepted' person. Excepted persons are those who are working full time, have disabilities or the recipient of a double orphan pension. The criteria for meeting these conditions are quite specific, and thankfully the ATO provides a very helpful guide to working out exactly whether or not you're included in one of these categories. If you qualify as an excepted person then all your income is taxed as though you were an adult.

‍

I'm young and unexceptional...

You're not, I promise. You're amazing!

But what that means is that instead of basing its decision on whether YOU are excepted, the ATO will consider whether your income is excepted.

Excepted income is considered to be the kinds of income which might be “earned” or “bequeathed”. So if you have a job working for someone else, or you run your own business, then that income is excepted. If you receive an inheritance, then that is excepted income too, as are some incomes derived from a testamentary trust from a deceased person's estate. This one gets pretty complex, because as we know, not all trusts are testamentary. The ATO, devoted explainers always, provide a great breakdown with examples here. (https://www.ato.gov.au/Individuals/Income-and-deductions/In-detail/Income/Your-income-if-you-are-under-18-years-old/?page=3#Work_out_if_you_receive_excepted_income)

Why does it matter?

The crunch comes when we're considering income which isn't excepted. That income is taxed at 45%, the equivalent of the highest marginal tax rate, once you earn more than $1,307 in a year.

So if you're under 18 and you're getting investment income from shares bought by your parents, or you're receiving income from a family trust, you may end up paying a much higher rate of tax. But only on the income that's not excepted. So if you have a job and you have investment income, the employment income is excepted and the regular marginal tax rates would apply.

To make things even more confusing, tax offsets like the Low Income Tax Offset only apply to excepted income and won't reduce any tax incurred from non-excepted income.

‍

Conclusion

While I certainly would love to have been a savvy seventeen year old with a weighty share portfolio, in reality there are a few taxation complications to consider around income for minors. If you're a parent looking to set up a long term investment on behalf of your child, it might be worth getting professional advice about doing that in the most effective way.

‍

‍

* The information provided in this article is general information only and does not take into account your objectives, financial situation or needs. Before making a financial decision, please assess the appropriateness of the information to your individual circumstances and consider seeking professional advice.