“Excepted income” of children (minors) is taxed at ordinary rates and excluded from the high marginal tax rates which would otherwise apply. Income from the child’s own wages, or from a child maintenance trust are examples of excepted income. A minor is someone under 18 at the end of the tax year.
Income which is not excepted income is subject to a reduced tax-free threshold, therefore mostly taxed at the highest marginal tax rate, and from 2011-12 does not benefit from the low income tax offset. (See Children Tax Rates)
A minor is an individual who is under the age of 18 at the end of the year of income.
Minors may be shielded from the application of the higher-taxing rules in a tax year if they were an “excepted person”. An excepted person pays tax at ordinary rates on all of their income.
A minor is an “excepted person” for a year of income if they were:
- working full-time, or had worked full-time for three months or more in the income year (ignoring full-time work that was followed by full-time study), and for most or all of the following year intending to work full-time and not intending to study full-time
- entitled to a disability support pension or rehabilitation allowance, or someone was entitled to a carer allowance to care for them
- permanently blind
- disabled and likely to suffer from that disability permanently or for an extended period
- entitled to a double orphan pension and received little or no financial support from relatives, or
- unable to work full-time because of a permanent mental or physical disability and received little or no financial support from relatives.
A minor who is not an excepted person will nevertheless only pay tax at the lower ordinary tax rates on that part of their income which is “excepted income”. Their other income (which is termed “eligible income”) is taxed at the higher minors’ tax rates.
Excepted income includes income from personal exertion – for example wages and salary – as well as a number of other specifically included income categories. To be “excepted” the wages or business income must be paid at an “arms length” rate – i.e. the rate which would be paid by someone not related to or associated with the minor.
Excepted Income of Minors includes the following:
- wages or income from services, including business and partnership income *
- taxable pensions or other income such as AUSTUDY paid by Centrelink or the Department of Veterans Affairs which is subject to the PAYG tax withholding requirements
- income from a deceased estate
- income from testamentary trusts
- investment income from investments (including via a trust) from:
- a public poverty relief fund
- winnings from an authorised lottery
- compensation proceeds, including an out-of-court settlement
- superannuation and life assurance proceeds
- child support proceeds following a family breakdown
- investment income from assets equivalent to an intestate value transferred from a deceased estate beneficiary within 3 years of death
- investment income from assets acquired through a family breakdown property settlement (s102AGA)
- income in the form of damages for an injury suffered and certain other losses or damages
- income from investment of any of the above
* The Commissioner has the power to determine which amounts are “reasonable” having regard to such factors as the extent of real and effective control exercised by the taxpayer over the business. There are anti-avoidance provisions aimed at arrangements which are non-arms length and/or aimed at obtaining excepted income.
Law Change From 1 July 2019 – Scope of “excepted income” Testamentary Trusts
From 1 July 2019 the scope of excepted income derived from a testamentary trust has been narrowed. Only income from property “transferred from the estate of the deceased person concerned, as a result of the Will” is treated as excepted income.
Furthermore the ATO view appears to be that income earned from assets acquired from the leveraging of assets which produce excepted income, will not be considered as excepted income.
- Testamentary Trust Law Change – Tax Talks
- The new excepted trust income provisions – clarity in the law – McCullough Robertson
- Testamentary Trusts and Excepted Trust Income – The New Normal – Legalwise
- Taxation of Testamentary trusts
- Work out if you receive excepted income – ATO
- Childrens tax rates
- Child Maintenance Trusts
- Tax Ruling TR 98/4 Income tax: child maintenance trust arrangements
- Guide to Testamentary Trusts: Who, What, When?
- Trust tax rates
- Tax Ruling (withdrawn but commentary still of relevance) IT 2489 Income tax : business income of minors
- Tax Determination TD 2017/11 Income tax: who should be assessed to interest on bank accounts?
This page was last modified 2021-06-10