Tax with Max: Tax rates for minors

Are children subject to tax, combining funds, finding an advisor, and more.

Summary: Do children under the age of 18 pay tax? The short answer is, yes, but it also depends on where the money has come from, and how much. Birthday presents are exempt, but only if the amount is deemed to be reasonable.

Key take-out: The Tax Office allows children to earn up to $416 a year tax-free, but after then fairly heft tax rates are imposed on additional income. They will be taxed at 66% on any income over the threshold.
Key beneficiaries: SMSF trustees and superannuation accountholders. Category: Superannuation.

Income tax rates for minors

Our grandchildren aged 10 and 13 have accumulated a modest amount of capital in bank accounts from family trust distributions paid to them over the years. In recent years the interest on the accounts has been somewhere between $400 and $1000 each. The interest is their only income as trust distributions have been discontinued. Are the children taxable on these sums and do they need tax file numbers and to lodge annual tax returns?

Answer: There are only a few circumstances under income tax law when interest earned on bank accounts in children’s names under 18 is not taxed at the punitive tax rate applying to minors. For interest earned on a bank account in a minor’s name to not be subject to the higher tax rate the funds in the account must have resulted from:

  • birthday presents,
  • Christmas presents,
  • pocket money, and
  • savings from part-time earnings.

Where the funds in the bank account have resulted from distributions from a family trust, or from excessive amounts paid as presents or pocket money, the special rates of tax will apply to interest earned on those accounts.

The tax rates applying to minors subject to the special rates of tax are as follows:

  • nil tax on interest and other income earned up to $416 a year,
  • 66% tax on income earned from $417 up to $1307, and
  • 45% tax on income earned over $1307.

From what you have described you should seek professional advice to assess if there are measures you can take that will reduce or eliminate this tax payable. This could include having the money in the bank accounts invested in other areas such as insurance bonds or shares.

Combining funds and maximising the non-concessional component

I am 69-years-old, have ceased part-time work at Christmas 2013 and have two superannuation accounts. The first super account is with a commercial superannuation fund and is made up of only non-concessional contributions. The second is an industry super account with 80% concessional and 20% non-concessional contributions.

The second account is in pension mode paying the minimal amount. I now wish to combine the two accounts to reduce the amount of fees being paid. I also have rental and dividend income outside of super which supplements my pension but could be used for additional non-concessional contributions this year. I wish to maximise the overall non-concessional component of my superannuation account once combined and wonder what would be the best tax-effective strategy to follow?

Answer: Because you are over 65, and if you have met the 40 hour work test in this 2014 financial year, you could make a non-concessional contribution of up to $150,000. If you met the work test for the 2015 year you could make a further non-concessional contribution of $180,000 after July 1, 2014.

If you want to maximise the non-concessional component of your superannuation there are number of steps that should be taken. These steps relate to the timing of when making contributions, combining superannuation account balances, or starting a pension. Before doing anything you should seek professional advice.

Finding an advisor to set up a SMSF

I have a friend that just lost her husband at 58 and is left with a reasonable sum to manage but hasn’t much idea of what her best options are. I expect you will say to find an independent advisor; that’s ok but how easy can she set up and run an SMSF with the assistance of her accountant, as I do?

Answer: Your friend should look for an accountant or financial advisor that specialises in both investment advice and self-managed super funds. There are a number of these professionals and a good place to start looking would be the Self-Managed Super Funds Professional Association Of Australia's website. The important thing for your friend to check is that the person giving the advice does it on a fee-for-service basis and does not charge a fee that is calculated as a percentage of the value of the investments owned by the SMSF.

Why establish a corporate trustee?

My SMSF administrator has recommended that I change from individual trustees to a corporate trustee. From what I have read I do not need to change the trustee if I don’t want to. This is just an option that I could take up if I wanted to have less administration costs down the track. Is it true that there is no need for me to change to a corporate trustee?

Answer: There is no regulatory requirement for you to change from having individual trustees acting for your SMSF to having a corporate trustee. The problem is that the longer your SMSF continues, and the more investments that it has, the greater that the administration work and cost will be when one of your individual trustees dies.

Apart from the setup cost of a company, there is very little cost in administration work and cost required to change from individuals to a company acting as trustee. Where a company acts purely in its capacity as trustee for a super fund it has a reduced annual fee with ASIC of under $50 a year.

In the end you will need to decide whether the extra cost and administration that would be involved now, if you appointed a company to take over as trustee, will be better than having to do this after one of the individual trustees dies when the administration and cost could be higher, and the surviving trustee is going through the emotional turmoil of dealing with their partners death.

Withdrawing super vs taking out a mortgage

My husband and I are both working and aged 59 and 57, respectively. We have moved from the country to the city and need to fund the purchase of a home at around $1.85 million including stamp duty. We have about $2.4 million in our own super fund invested, about half in equities and half in cash, and have $900,000 in a term deposit from the sale of our home.

I am considering retiring and have about $500,000 that I can take from super tax free, which is made up of $320,000 in funds from a tax-free pension and $180,000 as a one off tax-free withdrawal. The remaining $450,000 needed would have to be a mortgage. I am not sure whether this is the best strategy as the $500,000 withdrawn from super is earning about 5% tax free due to the TTR pensions in place. Would we be better to leave it there and take a bigger mortgage?

Answer: The only way that I know of to provide the advice that you require is to conduct a full tax and financial review of your current situation. This would take into account everything that you own, everything that you owe, what sources of income you have, and what your cost of living is.

Once all of these variables are taken into account you may well be better off by borrowing more to purchase the property and having more in superannuation. This strategy will work if you have the capacity to, in addition to meeting your mortgage repayments, maximise your superannuation contributions. Under this strategy the mortgage would be paid off at some time in the future when you both retire.

On the other hand if you are retiring and not earning any further income your option of taking the lump sum payment, and using it to minimise the amount of mortgage you will need to purchase the property, could very well be your best option. Given the complexity of your situation you should seek professional advice.


Max Newnham is a partner with TaxBiz Australia, a chartered accounting firm specialising in small businesses and SMSFs. Also go to www.smsfsurvivalcentre.com.au.

Note: We make every attempt to provide answers to readers’ questions, however, answers are of a general nature only. Subscribers should seek independent professional advice for more in-depth information that is specific to their situation.

Do you have a question for Max? Send an email to askmax@eurekareport.com.au