Taxing of Minor Eligible or excepted

Discussion in 'Accounting & Tax' started by smator, 3rd Oct, 2018.

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  1. smator

    smator Well-Known Member

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    Hi

    I'm looking at investing my daughter's earnings into a managed fund.

    Looking at the ATOs website, the income would be excepted as they are derived from an investment of employment income.

    What happens if the income from the investment is then reinvested? Is the income from this reinvested portion excepted or is this now treated as eligible income?

    Thanks!
     
  2. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    see section 6AA ITAA36
     
  3. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    A minor can only earn personal earnings from salary that is excepted (or some testamentary trust income and a business they operate etc). Investment earnings even as a byproduct of earning the income is NOT excepted income unless all the funds come from the earnings ( I may go as far as saying substantially all but havent had that tested). ATO seem to (sometimes) review past and current year earninsg in Item 1 (and business income etc) of the returns. If this is inconsistent with the investmnets a concern may occur. Blending inheritance $$ , parent gifts etc can be a problem in some cases.

    Your income if you are under 18 years old

    Minors who work hard are punished for saving. 66% once income exceeds $416 . May be better to defer any income to avoid this issue or ensure the amount invested would fall beneath this level.

    Most banks have a wonderful product that could also be considered. Its called a high interest savings account in the case of Westpac. It may pay 0.01% and avoid the tax concerns ..Banks are *******s. Its capital stable and pays jack income. When she turns 18 then hit the managed funds. Or shares with potential for growth that dont pay income
     
    Last edited: 4th Oct, 2018
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  4. Ross Forrester

    Ross Forrester Well-Known Member

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    If a child works, is paid a reasonable wage, and the child saves up their wage and then invests it properly - the income from the investments is taxed as an adult

    102AE(2)(f)

    The ATO website also confirms this position.

    Your excepted income includes:

    • employment income
    • taxable pensions or payments from Centrelink or the Department of Veterans’ Affairs
    • compensation, superannuation or pension fund benefits
    • income from a deceased person's estate
    • income from property transferred to you as a result of the death of another person or family breakdown, or income in the form of damages for an injury you suffer
    • income from your own business
    • income from a partnership in which you were an active partner.
    It also includes:

    • net capital gains from the disposal of any property or investments listed above
    • income from the investment of any of the amounts listed above.

    And to my mind the reinvestment of earnings attributable to the original source of labour income will qualify for the 102AE exemption.

    If a minor is given reasonable gifts, and then invests those gifts, and then earns income from those investments the income is tax at penalty rates.

    So do not mix the source.

    A family business is able to employ the families children under the age of 13 and avoid WA employment law restrictions.
     
    Last edited: 3rd Oct, 2018
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  5. Mike A

    Mike A Well-Known Member

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    agree with @Ross Forrester . Sorry @Paul@PFI the big NOT should be deleted. thats not correct

    (f) is derived by the minor from the investment of any property that, in the opinion of the Commissioner, represents accumulations of:

    income derived by the minor during a year of income in relation to which this Division applies;

    income derived by the minor during a year of income in relation to which this Division does not apply, being assessable income that would, in the opinion of the Commissioner, have been excepted assessable income if this Division were applicable in relation to the year of income during which the assessable income was derived; or

    income derived by the minor to which subparagraph (i) or (ii) would, in the opinion of the Commissioner, apply if that exempt income had been assessable income.
     
  6. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Yep, provided they have saved that. I have only even had this tested twice.

    1. The parent gifted some of the funds to the child who worked part-time at school to add to the total invested. ATO said investment income was not excepted.
    2. A child received a inheritance. Also worked. Sum they earned working was substantially less than total invested. eg $2k earned, $10K invested/ ATO said not expected.

    Seems that at times ATO review past salary and wage earnings and do single out some for review. But 2 in 25 years is not a lot. I have never seen a test for the degree to which the funds can be traced to earnings however. eg Kids earns $10K working, Has $10k from inheritance....No tracing specifically between $$ earned and direct savings. ie Kids spends earnings but then invests what was earned.

    Ross, Mike - ever had this tested ?
     
    Last edited: 4th Oct, 2018
  7. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    I think the legislation is pretty clear.
     
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  8. Ross Forrester

    Ross Forrester Well-Known Member

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    I have had a few comprehensive risk reviews for clients in this situation and it has never arisen.

    Quite often the family business will pay a child for working in the business but then keep their salary seperate and invested for them. It is a good step in educating kids about hard work, tax structuring and the power of investing.

    I have never had a client go to audit. But that might be more of a reflection of our approach in reviews.
     
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  9. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    I always come back to a "reasonable" approach
     
  10. smator

    smator Well-Known Member

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    Thank you everyone for your detailed responses, appreciate it!
     
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