Less money for the kids

While “Less money for the kids” sounds like a good concept, one that most parents would agree with, it’s actually bad news for those parents who distribute some of their taxable income to their children via a family trust.

Trust Distributions to the kids must drop

Australia’s tiered taxing system for individuals has a ‘tax free step’ below which no tax is paid, then increasingly higher rates applying to different bands of income.  For families who have income flowing from sources other than wages and salaries, like interest, dividends and rental income, it has been a common practice to have that income flow through a family trust and divert the income away from the high-rate taxpayers to those with the lowest income.  Families with children under 18 could in the past distribute this income to their children even though they had not earned it in the traditional sense.  The tax rates on “unearned income” however are penalty rates as they jump quickly to 45%.

Unearned Income Tax Rates
$0 – $416 Nil
$417 – $1,307 Nil + 66% of the excess over $416
Over $1,307 45% of the total amount of income


Prior to the 2012 year, the ATO’s Low Income Tax Offset (LITO) rules meant that children with unearned income totalling $3,333 would pay no tax, despite the penalty rates.

The 2012 Federal Budget includes changes to limit the availability of the LITO for minors to employment income only.

The new rules came into effect from 1 July 2011 and mean that unearned income will revert to being taxed at rates in the table above.

How are you affected?

You need to review you trust’s distribution strategy.  From the 2012 year onwards, you can no longer allocate as much to the children tax free.

You should also review the income that your kids earn from bank accounts and shareholdings that may be in their name.  The 45% rate kicks in pretty quickly, so they could find themselves paying tax this year, at penalty rates, where they haven’t had to pay tax in the past.

If you want to know how this change effects you,
give us a ring on (03) 9585 7555 and ask for Noel or Amanda
or contact us by email atnoel@mktax.com.au