When parents think about setting their kids up for the future, investing on their behalf often comes to mind, but it’s important to first understand the tax rules for children.
Whether it’s popping birthday money into a high-interest savings account, buying a few shares, or planning ahead with more structured investments, building wealth early sounds like a smart move. But before you dive in, it’s important to understand how the Australian Tax Office (ATO) treats income earned by minors. The tax rules for children aren’t the same as they are for adults, and without the right structure, a big slice of that “future nest egg” could disappear to tax.
At Lemonade Beach, we’re accountants – so our role is to help you understand the tax implications of investing for your children. We’re not financial planners, so this article isn’t about where or how you should invest, but rather what the tax rules mean if your child earns income.
Why Do the Rules Exist?
The ATO is well aware that some families might be tempted to put assets in their kids’ names just to take advantage of lower tax thresholds. To prevent this, special rules apply to income earned by minors (under 18 years old). These rules distinguish between:
- Excepted income (which is taxed just like adult income), and
- Unearned / investment income (which is taxed at much higher rates).
-
Excepted Income – Treated Like Adults
This is income your child genuinely earns or receives through certain allowances. It includes:
- Wages and salaries (part-time or casual work)
- Payments from deceased estates
- Compensation or damages for personal injury
- Distributions from testamentary trusts
This type of income is taxed at normal adult tax rates. So if your teenager gets a job at the local café, their pay is treated just like any other taxpayer’s – meaning they benefit from the standard tax-free threshold and lower marginal tax rates.
-
Unearned / Investment Income – Special Rates Apply
This is where things get tricky. If your child earns money from passive investments, such as:
- Interest from bank accounts
- Dividends from shares
- Rental income
- Most trust distributions
it’s subject to much higher “penalty” tax rates.
Here’s the breakdown:
- $0 – $416: No tax payable
- $417 – $1,307: Taxed at 66% of the amount over $416
- Over $1,307: The entire amount is taxed at 45%
In practice, this means that even modest amounts of passive income in a child’s name can be taxed at rates higher than what you (the parent) might pay.
For example, if your child earned $1,000 in interest from a bank account in their own name, the first $416 would be tax-free, but the remaining $584 would be taxed at 66% – wiping out nearly $385 of their return.
What Does This Mean for Parents?
While investing for children can be a fantastic way to teach financial responsibility and give them a head start, the tax treatment needs to be carefully considered. Holding investments directly in a child’s name is often not the most tax-effective option.
Instead, families may choose to explore alternatives such as:
- Investing in a parent’s name – sometimes more tax-efficient depending on your own marginal rate.
- Education or investment bonds – these can be more tax-friendly, provided you stick to certain rules.
- Trust structures – in some cases, these allow flexibility in distributing income, although most distributions to minors are still caught by penalty rates unless they fall under “excepted income.”
Because the best choice depends on your family’s financial situation, goals, and risk appetite, it’s wise to seek professional advice before setting anything up.
How We Can Help
At Lemonade Beach, we:
- Help you understand the tax outcomes of different investment structures.
- Advise on record-keeping and reporting obligations (because no one wants a surprise ATO letter).
- Work alongside your financial planner so your investment strategy is also tax-smart.
We don’t provide financial planning advice – that’s the role of a licensed financial planner – but we do make sure your accounting and tax position supports your family’s long-term goals.
The Bottom Line
Investing for your kids can be a wonderful gift, but the tax rules mean you need to think carefully about how you set things up. Without the right approach, much of the return could be eaten up before your child even benefits.
If you’re considering starting an investment for your children, talk to us about the tax side of the equation. We’ll help you navigate the rules, avoid unnecessary tax headaches, and ensure that when the time comes, your child actually gets to enjoy the fruits of your forward planning.
