The Treasurer Has His Hands In Your Children's Pockets Too

Penal tax rates may apply to bank interest derived by a child

  • Make it clear whose money it is
  • Beware generous grandparents bearing gifts!
  • Shop around for the best bank savings account deals

My eldest daughter who is still at school has recently started a casual job to earn some extra pocket money, and I know a lot of readers either have kids and may not be aware of the tax consequences of theim having their own income. So it is timely to report on the tax position that my daughter and her parents operate in, and if you have kids of any age you should know this stuff too who is assessable for Income tax on the Income of a child.

Here are 7 tax tips relating to child bank accounts:

1. A child’s bank interest can attract extraordinary high tax rates in some situations.

Check out these penal rates of tax that can apply to bank interest derived by a child.

STRATEGY: You can see from the table that keeping bank interest below $416 p.a. is one way to keep junior out of the tax net.

2. Whose money is it anyway?

The ATO's view is that where a parent operates an account on behalf of a child, but the the child really owns the money in the account, the parent can include the interest in a tax return lodged for their child.
This delivers a better outcome where the parents tax rate is high rates but the child can use the $416 tax free threshold.


  • The money in the bank account needs to genuinely belong to the child, not just be spent on them.
  • Expenses to do with the child – such as school fees, school camps and sport lessons – should be paid from the parents’ bank account, not the child's.
  • Where the bank account is opened in the parent's name under an informal trust account arrangement, control needs to be handed over when the child turns 18.
  • Don’t forget to lodge a tax return if your childs income goes above $416, [Note: The ATO data-matches with banks and conducts follow-up investigations.]
  • A child’s bank account must be handed over to them to control once they are 18.

3. Should a child have a Tax File Number (TFN)?

If a child has a bank account in their own name, and the account earns less than $416 interest each year, then they don't need a TFN if aged less than 18 years. Children are nonetheless eligible for a TFN from birth.
As noted earlier, practical problems often arise where a parent’s TFN is quoted for a bank account that genuinely contains the child’s own money.
So getting in early, applying for a TFN and quoting the child’s TFN where possible can be a good idea.

4. Children and part-time or casual jobs

Bank accounts are often opened when a child gets their first part-time or casual job.

The child’s wages from their own efforts are known as 'Excepted Income' subject to ordinary income tax rates with an $18,200 tax free threshold, not the penal tax rates applicable to bank interest.

So, apart from needing a TFN to lodge a tax return, a TFN also avoids over-withholding of PAYG withholding when the child is paid their wages.

Beware though - if the job is in the parent’s small business, make sure the salary is arm’s length (i.e. reflects what a non-family employee would earn for the same work and hours). A business that pays excessive amounts as wages to relatives will have some explaining to do if the ATO comes knocking.

Pocket-money received from a parent or payment for household tasks, such as mowing the lawn, isn’t taxable.

5. Beware generous relatives!

Problems often arise if a generous relative (often grandparents) gift largish amounts of money into the bank account of a child. Such gifts should be talked through beforehand to avoid penal tax rates on bank interest.

STRATEGY: It may be better for grandparents to pay for one-off costs rather than deposit money directly into the child’s bank account. Alternative strategies such as insurance bonds or shares may also be a better option.

Grandparents also need to be particularly careful to first ascertain the impact their gift might have on their own government pension entitlements.

6. Family trust distributions

Penal tax rates for children can also apply to family trust distributions made to a child, although special concessions may apply (e.g. for a testamentary trust for a child established as part of the deceased’s will).

Parents thinking of establishing family trust arrangements should get professional advice.

7. Watch out for bank fees and look for good deals

Not all bank accounts are the same. Seek out the many low fee accounts available from banks for their young customers. Some also offer incentive interest rates (e.g. if no withdrawals are made for a specified period). Consumer group Choice has a useful website for choosing a suitable bank account.

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Mark Rosen
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