© National Core Accounting Publications Chapter 1 Income of Minors 1 © National Core Accounting Publications

© National Core Accounting Publications 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”. 2 © National Core Accounting Publications

© National Core Accounting Publications Prescribed Minors A person coming under Division 6AA is called a prescribed person. s.102AC(1) ITAA36 defines a prescribed person as "any person under 18 at the end of the year of income who is not an excepted person." 3 © National Core Accounting Publications

© National Core Accounting Publications Excepted Minors s.102AC(2) ITAA36 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. 4 © National Core Accounting Publications

© National Core Accounting Publications Excepted Minors s.102AC(2) ITAA36 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. 5 © National Core Accounting Publications

© National Core Accounting Publications 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. 6 © National Core Accounting Publications

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

© National Core Accounting Publications 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 6AA tax rates apply to unearned income. 8 © National Core Accounting Publications

© National Core Accounting Publications 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). 9 © National Core Accounting Publications

© National Core Accounting Publications Assessable Income Excepted assessable income of a minor includes: assessable pensions and payments from Centrelink or the Dep’t of Veteran’s Affairs. 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). 10 © National Core Accounting Publications

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 income (e.g. part-time employment income) their excepted taxable income is taxed at ordinary marginal tax rates. has some excepted assessable income (e.g. part-time employment income), and eligible assessable income (e.g. a family trust distribution) their excepted taxable income is taxed at ordinary marginal tax rates, and, their eligible taxable income is taxed at the Division 6AA tax rates. only has eligible assessable income (e.g. a family trust distribution) their eligible taxable income is taxed at the Division 6AA tax rates. 11 © National Core Accounting Publications

© National Core Accounting Publications Division 6AA 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

Low Income Tax Offset and Minors Since 1 July 2011 the low income tax offset has been 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. 13 © National Core Accounting Publications

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 2014. 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. 14 © National Core Accounting Publications

Illustration: Taxation of a Minor Solution: Tax Payable is: Tax on 19,000 @ Ordinary rates $ 152.00 Tax on 6,000 @ Division 6AA rate of 45% 2,700.00 2,852.00 Less Low Income tax offset $445 but limited to: 152.00 2,700.00 Plus Medicare Levy 375.00 3,075.00 less PAYG tax withheld 900.00 Balance Payable 2,175.00 15 © National Core Accounting Publications

Illustration: Prescribed Person - Comprehensive The following information relates to Mark James, a full-time secondary student aged 16, for the year ended 30 June 2014: Gross wages from a part-time job at McDonalds 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. 16 © 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 Applicable tax rate Gross wages $ 2,750 Ordinary marginal rates Interest 26 Ordinary marginal rates Franked dividend 950 Division 6AA rates Franking credit 407 Division 6AA rates Family Trust income 5,000 Division 6AA rates Deceased Estate Trust income 25,000 Ordinary marginal rates 34,133 less Deductions Donation 100 34,033 7 © National Core Accounting Publications

Illustration: Prescribed Person - Comprehensive Apportion Donation: Amount at ordinary marginal rates Amount at Division 6AA tax rates 100 x 27,776/34,133 = $81 100 x 6,357/34,133 = $19 Tax Payable is: $ $ Tax on (27,776 - 81) @ Ordinary rates 1,804.05 Tax on (6,357 - 19) @ Division 6AA rate of 45% 2,852.10 4,656.15 Less s.100 credit (2,250 + 1,292) * 3,542.00 Low Income tax offset ** 445.00 Franking tax offset 407.00 4,394.00 262.15 Medicare Levy 510.50 772.65 less PAYG tax withheld 800.00 Refund Due 27.35   Notes:  * The s.100 credit is discussed in Chapter 2: Trusts.  ** The full Low Income tax offset amount of $445 can be applied against tax at ordinary marginal rates on excepted taxable income. 18 © National Core Accounting Publications