Q: I am thinking of setting up a bank account for my child. What are the tax implications?
A: The Australian Taxation Office has issued a tax determination this year (TD 2017/11), setting out its approach to taxing interest on banks accounts.
For income tax purposes, interest income on a bank account is assessable to the person or persons who beneficially own the money in the account.
Where a parent operates an account on behalf of a child, but the ATO is satisfied that the child beneficially owns the money in the account, the parent can show the interest in a tax return lodged for the child.
Where interest income in a bank account is assessable to a child under 18, that income may be subject to higher tax rates under the rules in Division 6AA of Part III of the Income Tax Assessment Act.
For a child under 18, a tax rate of 66 per cent applies to “unearned” income between $416 and $1307, such as interest from savings. For income above $1307 the rate is 45 per cent. These punitive rates have been imposed to deter parents from using their children for tax avoidance.
The ATO has provided some examples of how it assesses beneficial ownership. A child aged 14 has accumulated $5000 over the years from money given at birthdays and other special occasions. The child’s father has placed the money in a bank account, which he operates on the child’s behalf. The father does not use the money in the account for himself or others.
In this case the child has beneficial ownership of the money in the account and is therefore assessable on all of the interest income. As the child is under age 18 he will be subject to higher rates of tax under the rules of Division 6AA of Part III of the Income Tax Assessment Act.
In another example, a parent may open an account for a child in the child’s name, with an initial deposit of $10,000. The mother is a signatory to the account and makes regular deposits and withdrawals to pay for the child’s school and other expenses.
Because the mother spends the money in the account as if it is her own, the ATO considers her the beneficial owner and she is assessable on the interest income.
The ATO also looked at joint accounts in its tax determination. Unless there is evidence to the contrary, it is presumed that joint account holders beneficially own the money in equal shares.
This might vary if there is evidence about who contributed money to the account or who used the account as their asset.
For example, if one party contributed all of the money and treated all of the interest as their money, then that party would be considered to have the beneficial ownership.