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Chapter 1
Income of Minors 1
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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
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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
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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
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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
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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
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7. 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
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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
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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
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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
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11. 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
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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
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13. 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
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14. 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
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15. Illustration: Taxation of a Minor
Solution:
Tax Payable is:
Tax on Ordinary rates $
Tax on Division 6AA rate of 45% 2,700.00
2,852.00
Less Low Income tax offset $445 but limited to:
2,700.00
Plus Medicare Levy
3,075.00
less PAYG tax withheld
Balance Payable 2,175.00 15
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16. 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
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17. 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 Division 6AA rates
Franking credit 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
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18. Illustration: Prescribed Person - Comprehensive
Apportion Donation:
Amount at ordinary marginal rates Amount at Division 6AA tax rates
100 x 27,776/34,133 = $ x 6,357/34,133 = $19
Tax Payable is: $ $
Tax on (27,776 - Ordinary rates 1,804.05
Tax on (6,357 - Division 6AA rate of 45% 2,852.10
4,656.15
Less s.100 credit (2, ,292) * 3,542.00
Low Income tax offset **
Franking tax offset ,394.00
262.15
Medicare Levy
772.65
less PAYG tax withheld
Refund Due
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
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