Opinion
How do I avoid my kids being taxed at 66%?
Noel Whittaker
Money columnistI’ve just realised my 17-year-old daughter will earn $650 in interest this financial year. Her savings are an accumulation of her earnings from her casual job since age 14. Is there a way to avoid the 66 per cent tax on the amount over $416? Can she make a tax-deductible donation? Could anything be done to avoid this next year?
The 66 per cent tax you mention on income over $416 a year is children’s tax. That’s the earnings on money that is being gifted to a minor. In your case, as the money has come from her personal exertion, she will be exempt from the children’s tax and just pay tax at normal rates.
It would be wise to keep any money gifted to her in a separate account as the interest on that would be hit with the penalty tax.
Children are taxed at a much higher rate than adults, but this won’t apply to their own earnings.Credit: Dominic Lorrimer
Can I have two pension phase superannuation accounts, and can they be with the same fund? If yes, does the total amount in both pension superannuation accounts have to be under $1.9 million?
You can have as many pension accounts as you wish. But there is a limit to the amount of money you can transfer to pension mode. This is called your transfer balance cap. Once you have used up your cap you cannot make any more transfers to pension mode.
Many people used the entire $1.6 million cap when it was introduced in 2017 and as a result, they can’t transfer any more funds to pension mode. There’s no limit on what the pension may grow to. This will happen if your returns exceed your draw downs.
My wife has retired, is 71, but still maintains a superannuation account with about $150,000 in it. I believe that this account is in accumulation mode. If she converts her super to pension mode, do the funds in pension mode remain invested in the traditional markets, or are the funds frozen at the time of conversion to pension mode and are no longer subject to market interactions? Currently, she doesn’t need access to these funds.
Think of superannuation like two pots – there is one group of assets in the accumulation pot and another group of assets in the pension pot. The choice of those assets is up to you. There is no mandatory asset allocation.
I do wonder why she is keeping the money in accumulation mode – she will get higher net returns in pension mode. The only drawback is she will need to make the compulsory draw downs each year.
When my nieces were born, I set up bank accounts for them. I then transferred money into these accounts every month over the next 10+ years, plus some extra on their birthdays. I did this at the time because I knew their parents weren’t great with their own personal finances, so I assumed (correctly) they would not do this. Fast-forward 14 years, now that I have my own kids, I decided to transfer the total money to my sister-in-law to put into accounts for the two girls. She did this (however not in their names). A few months later, my brother and sister-in-law have separated, and the whole amount was cleared out by my sister-in-law, approximately $15,000. It’s all gone.
My question is, I want to start saving again for my nieces knowing they will now have next to nothing when they turn 18. What is the best way to do this? Should I just open accounts again but not tell their parents and simply hand over the money directly to them when they’re 18? Or do you suggest alternative methods?
You have highlighted the problems that can arise when people keep money for other people in bank accounts. A much better option would’ve been to use investment bonds about which I have written about often.
As they are a tax-paid investment, there is nothing to declare on anybody’s annual tax return, and you are free from the children’s tax mentioned above. You could invest the money in a bond for each child with you as the owner and the child as the nominated beneficiary. They can be transferred to the child free of capital gains tax at a time of your choosing.
Noel Whittaker is the author of Wills, Death & Taxes Made Simple and numerous other books on personal finance. Email: noel@noelwhittaker.com.au
- Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.
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