Chapter 15 Income of Minors National Core Accounting

Chapter 15 Income of Minors © National Core Accounting Publications 1

Overview Special rules apply to the taxation of income derived by non-working, unmarried persons who are under 18 on the last day of the tax year. These rules are designed to discourage diverting income to minors by "income splitting”. © National Core Accounting Publications 2

Prescribed Minors A person coming under Division 6 AA is called a prescribed person. s. 102 AC(1) ITAA 36 defines a prescribed person as "any person under 18 at the end of the year of income who is not an excepted person" © National Core Accounting Publications 3

Excepted Minors s. 102 AC(2) ITAA 36 defines an excepted person as: • a person who is classified as being in a “full-time occupation” i. e. engaged in a full-time occupation on the last day of the year of income, or engaged in full-time employment for at least three months of the income year © National Core Accounting Publications 4

Excepted Minors s. 102 AC(2) ITAA 36 defines an excepted person as: • Entitled to a disability support person or rehabilitation allowance, or someone was entitled to a carer allowance to care for them. • Entitled to a double orphan person 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. • Permanently blind © National Core Accounting Publications 5

Excepted Minors An excepted minor also includes a minor who was: • intending to work full-time for most or all of the income year, or • who was not intending to study full-time during the income year © National Core Accounting Publications 6

Tax Implications Excepted minors Prescribed minors Taxed at ordinary marginal tax rates © National Core Accounting Publications Taxed at Division 6 AA penalty rates of tax, unless income is excepted assessable income which is taxed at ordinary marginal tax rates 7

Assessable Income Eligible assessable income of a minor includes unearned income: Dividends, interest, rent, royalties and other types of income from property such a family trust distributions. The Division 6 AA tax rates apply to unearned income. © National Core Accounting Publications 8

Assessable Income Excepted assessable income of a minor includes: • employment income such as wages, salaries, payments made for services rendered • business income (provided the minor has real and effective control over their share of the business income) • assessable pensions and payments from Centrelink or the Dep’t of Veteran’s Affairs © National Core Accounting Publications 9

Assessable Income continued Excepted assessable income of a minor includes: • income derived from the investment of: compensatory damages awards, superannuation fund payments, property transferred to the minor as the result of a family breakdown, lottery winnings, income from reinvestment of excluded income • excepted trust income (i. e. income from a deceased trust estate) © National Core Accounting Publications 10

Taxation of Eligible and Excepted Assessable Income The income of a prescribed person is assessed as follows: If the minor Then only has excepted assessable their excepted taxable income is taxed income (e. g. part-time at ordinary marginal tax rates. employment income) has some excepted assessable their excepted taxable income is taxed income (e. g. part-time at ordinary marginal tax rates, and, employment income), and eligible their eligible taxable income is taxed assessable income (e. g. a family at the Division 6 AA tax rates. trust distribution) only has eligible assessable their eligible taxable income is taxed at income (e. g. a family trust the Division 6 AA tax rates. distribution) © National Core Accounting Publications 11

Division 6 AA tax rates Taxable income Tax Rate $0 – 416 Nil $417 – 1, 307 66% on excess over $416 $1, 308 + 45% flat on whole of taxable income © National Core Accounting Publications 12

Low Income Tax Offset and Minors Since 1 July 2011 the low income tax offset is unavailable to the unearned income of minors, effectively reducing the tax-free amount that can be distributed to them to $416. Income earned by minors from employment such as wages or salary is still eligible for the full benefit of the LITO. © National Core Accounting Publications 13

Illustration: Taxation of a Minor • Fatima, a full-time secondary student aged 17, had a taxable income of $25, 000 for the year ended 30 June 2013. This comprised of gross wages from part-time employment of $19, 000 (PAYG withheld $900), interest from investments of $6, 000. Required: Calculate tax payable. © National Core Accounting Publications

Illustration: Taxation of a Minor Solution: Tax Payable is: Tax on 19, 000 @ Ordinary rates Tax on 6, 000 @ Division 6 AA rate of 45% Less Low Income tax offset $445 but limited to: Plus Medicare Levy less PAYG tax withheld Balance Payable © National Core Accounting Publications $ 152. 00 2, 700. 00 2, 852. 00 152. 00 2, 700. 00 375. 00 3, 075. 00 900. 00 2, 175. 00

Illustration: Prescribed Person - Comprehensive • The following information relates to Mark James, a full-time secondary student aged 16, for the year ended 30 June 2013: § Gross wages from a part-time job at Mc. Donalds were $2, 750 (PAYG tax withheld $800). § Bank interest derived on an account kept for the deposit of his wages amounted to $26. § He received a fully franked dividend of $950 from CRA Ltd (franking credit $407). The shares were given to him by his parents. § Mark James was a beneficiary of a discretionary family trust created by his father. He has a vested and indefeasible interest in income under this trust, to be accumulated until he is 18 years old. § His entitlement this year was $5, 000, with tax already paid by the Trustee of $2, 250. § Mark James is presently entitled to a share of $25, 000 income from the Estate of his Auntie Joan who died last year. Tax paid by the Trustee on Mark’s behalf was $1, 292. § Donations made by Mark were $50 to Sydney Swans Football Club and $100 to the Australian Red Cross. © National Core Accounting Publications

Illustration: Prescribed Person - Comprehensive Required: Calculate the following: (a) Taxable income. (b) Tax payable. Solution: (a) Taxable income is: Assessable income Gross wages Interest Franked dividend Franking credit Family Trust income Deceased Estate Trust income less Deductions Donation $ 2, 750 26 950 407 5, 000 25, 000 34, 133 100 34, 033 © National Core Accounting Publications Applicable tax rate Ordinary marginal rates Division 6 AA rates Ordinary marginal rates

Illustration: Prescribed Person - Comprehensive Apportion Donation: Amount at ordinary marginal rates 100 x 27, 776/34, 133 = $81 Amount at Division 6 AA tax rates 100 x 6, 357/34, 133 = $19 Tax Payable is: Tax on (27, 776 - 81) @ Ordinary rates Tax on (6, 357 - 19) @ Division 6 AA rate of 45% Less s. 100 credit (2, 250 + 1, 292) * Low Income tax offset ** Franking tax offset $ 3, 542. 00 445. 00 407. 00 Medicare Levy less PAYG tax withheld Refund Due $ 1, 804. 05 2, 852. 10 4, 656. 15 4, 394. 00 262. 15 510. 50 772. 65 800. 00 27. 35 Notes: *The s. 100 credit is discussed in Chapter 16: Trusts. ** The full Low Income tax offset amount of $445 can be applied against tax at ordinary marginal rates on excepted taxable income. © National Core Accounting Publications