Taxing kids’ savings accounts

Back in the 1980s, people could reduce tax by having their money in bank accounts belonging to their kids. In 1988, the Tax Office intervened by issuing guidance about how they tax children’s savings accounts.

Thanks to a simple criterion and penal tax rates, parents cannot pass off their money as mere pocket money for the kids in order to avoid paying tax on interest they earn.

Whose money is it?

Children must “own” the money in their bank accounts. It doesn’t matter if parents, relatives or friends put it there; money deposited as a gift or as payment for some kind of informal work must belong solely to the child (under 18 years old).

If a parent uses a child’s bank account as a through-point for income, any interest generated must be included in the parent’s tax return.  Birthday or Christmas money is also considered money “owned” by the child.

It’s worth noting that kid’s bank account interest earnings have a tax-free threshold of $416 per income year, but once the threshold is exceeded, any interest from a child’s bank account is taxed at 66%. Once it’s more than $1,307, it’s the top marginal rate.

Who files the tax return for a child who earns interest?

If a child’s bank interest earnings exceed $416 — and the money belongs solely to the child — the interest must be included in a tax return. In most cases, that’s a parental responsibility.

The Tax Office says: “As a general rule, where the Taxation Office is satisfied that the money in the account really belongs to the child, it will not insist on a strict application of the trust provisions of the Income Tax Assessment Act where the account is operated by a parent as trustee. Where the interest is shown in a tax return lodged by a child a trust tax return will not be necessary.”

In most cases, parents operate their children’s bank accounts. In these circumstances, the parents act as trustees — making withdrawals and deposits on behalf of the child.  Say, for example, the parents of one-year-old Will open an account on his behalf and deposit $20,000 as university savings. It’s technically Will’s money and he’ll earn interest on it. But he can’t fill out his own tax return. For all intents and purposes, he’s a beneficiary with his parents acting as trustee. They will therefore need to lodge the necessary paperwork when tax time rolls around.