I bought some shares (Cochlear, CSL and Computershare) for DS2 about ten years ago, as I'd made a similar gift to DS1 around that age. DS2 had his tax file number issued, and the shares were purchased in his name (but with DW and myself as trustees on the trading account, as I couldn't get a share trading account setup in only his name as he is under 18) and the dividends were paid directly into his St George student savings account. The idea was that having actual investments of their own would make the kids' lessons about investing, compound interest, budgeting and saving, and tax a lot more 'real'.
I'd previously done DS2s tax returns for the years up until 2012 and for 2014 (fortunately he didn't get enough annual income to be subject to the 66% child tax rate that applies to minors if they get more than $416 of 'unearned' income, so it was worth doing his annual tax returns so that he got the franking credits on his dividend payments refunded). But I hadn't yet lodged DS2s tax returns since 2014 when the old eTax software was replaced with having to lodge tax returns electronically online via a link of a myGov account to the ATO, which was rather complicated to do for another person (so I didn't get around to it). As DS2 had made undeducted contributions into his superannuation account in each of the past two financial years, I decided was high time that I made the effort to get his myGov account setup (easy) and linked to his ATO TFN (not so easy - for some reason it wouldn't validate using the bank account details, even though once it was setup it turned out that the interest for those account was autopopulated in his tax return!). I had to call the ATO and have DS2 on speaker phone with me (luckily I'm working from home, and DS2 is on school holidays) so we could both identify ourselves and get a linking code issued by the ATO to connect DS2's myGov account to his ATO TFN.
Once that was all done I started working through DS2's electronic tax returns from 2014 onwards. I got DS2 to 'help' do his tax returns, although I must admit that even I find doing tax returns less than exciting (and DS2 certainly was keen to get back to playing Fortnite!) For the first few annual returns DS2 will be due a small tax refund (due to the franking credits), but in each of the past two years his total income was over the $416 child tax rate threshold, so he has a tax liability (that was mostly offset by the franking credits) for those years. Over the entire six years of past tax returns that have now been lodged he'll end up owing about $33 of income tax. It was still worth lodging his tax returns, as he had made $1000 contributions into his superannuation in each of the past two financial years (from money he had earned doing some busking (hobby income, hence not taxable), and various amounts he'd received for birthday and xmas gifts etc.). Once his tax returns have been processed he should get a $500 government co-contribution into his superannuation account for each $1000 annual contribution.
With the covid-19 recession impacting dividend payments, and DS2 having spent some of his bank savings on a gaming desktop computer, its likely that he'll have low enough income from now until he turns 18 to avoid any child tax liability for future income years. I'll encourage him to continue making a $1,000 contribution into his super each year, so that he gets the immediate 50% benefit of the government contribution into his super each year, and the investment will enjoy about 50 years of compounding in a low tax environment (if the current superannuation system doesn't get changed completely over that time) until he retires.
FY taxable income franking credits net tax refund (liability)
2014 424 34 34
2016 503 66 7
2017 492 62 10
2018 541 60 (22)
2019 656 96 (62)
overall (33) tax liability
The way child tax works is a bit weird - if they have less than the threshold amount ($416) of 'unearned' income, there is no tax liability, but as soon as they exceed $416 the entire amount is subject to the 66% tax rate. So, if child A had $415 unearned income their tax liability is $0, but if child B had $420 of unearned income their tax liability is $135.20 + 66% of the amount over $416. So it is definitely worth trying to keep his unearned income below $416 - perhaps by not having his savings in an interest earning bank account.
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