03.Steep tax rates for children
Since 1 July 2011, steep tax rates have applied to the interest income of children. In 2010-11 the low-income tax offset still applied to children, which resulted in a tax-free interest income of up to $3334. See the ATO announcement.
But since 2011-12, only $416 has been tax free. Depending on the interest rate, $416 interest could be paid on an account balance of between $7000 and $10,000.
Anything above $416 up to $1307 is taxed at 66%. If a child has interest income of more than $1307, the whole amount is taxed at 45%. No Medicare levy applies so long as the child’s income is below the low-income earner threshold ($18,488 in 2010-11). Once the income is above $416, the child also has to lodge a tax return.
Exemptions apply for children who work full-time and those with certain disabilities. The ATO also has strict rules about whether the income belongs to the child or the parent. If you transfer money into the account and use some of it to pay for child care or school fees, for example, the ATO considers the interest to be your income and so it must be declared on your tax return.
For the interest to apply to your child, the money must be genuinely gifted to them and you must not intend to use it – not even on their behalf. For more information check with the ATO.