If you have a son or daughter under 18, you need to check the amount of interest and income they earn in any one financial year. Otherwise, they could get into trouble if they don’t fill out a tax return and pay tax.
Working your way through the tax system for your own return is tricky enough, but you’ll have to make sure your kids do one too, depending on the level of their earned and unearned income.
When does your child need to quote their tax file number (TFN) and lodge a tax return?
Your child should fill in an application form for a TFN and give it to their high school, which will then send it to the ATO for processing. This is the far easier option because your child will not have to go to great lengths to proving their identity to the ATO.
If your child is under 16 years old and the interest they receive in a savings account is above $420 each year, they must lodge a tax return to the Australian Taxation Office (ATO).
If they are over 16 years old and the interest from their savings account is above $120, they also need to lodge a tax return.
They do not need to lodge a return if they earn less than $3,334 from their (part-time) job over a financial year, because they are covered by the low-income tax offset (LITO).
However, your child needs to lodge a return if they are having money taken out of their wage – the pay-as-you-go (PAYG) tax – in order to receive the tax refund, if they are eligible.
The LITO only reduces the tax payable on your kid’s wage or salary; it can’t be used to reduce the tax payable on unearned income (such as interest from their savings account).
If you do not plan to lodge a return, it’s best to call the ATO and notify them that you won’t be filling out a return for your child. Regardless of your situation, it doesn’t hurt to complete a tax return.
Who should declare the interest earned in a kid’s savings account?
This depends on who operates and uses the funds.
If you, the parent, make deposits and spend the money in your child’s account (even if it’s to buy things for your kid), then you must declare the interest when filling out your own tax return. The same rule applies if the income is held in a trust for your child that you manage.
Alternatively, if your child manages their own account, then they must declare any interest in their own tax refund.
What about gifts?
If your child receives valuable gifts other than money (such as jewellery from a birthday or a religious celebration), those items are not subject to tax.
If the gift is money which is deposited into the child’s savings account, then the interest generated from the monetary (not the money itself) would be considered taxable income.
When your child fills out the tax return
If your child is under 18, it is important they correctly complete the section ‘A1: Under 18 Excepted Net Income’ when lodging a tax return. Otherwise, every dollar of their income will be taxed at 45c.
However, they can amend the tax return if they think they’ve made this mistake.
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