Does your child have a bank account? If they do – you might be liable for income tax!

Does your child have a bank account? If they do – you might be liable for income tax!


  • Higher tax rates may apply to bank interest derived by a child
  • Make it clear whose money it is
  • Beware generous grandparents bearing gifts!
  • Shop around for the best bank savings account deals

The recent ATO ruling TD 2017/11 will be of practical relevance to parents. The ruling states that “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.”

It deals with the topic of who should be assessed for income tax on interest on a bank account opened for a child.

Here are 7 tax tips relating to child bank accounts from the Tax Team at Chartered Accountants Australia and New Zealand.

  1. A child’s bank interest can attract penal tax rates in some situations

Check out the penal rates of tax that can apply to bank interest derived by a child on the ATO website. You can see from the ATO table that keeping bank interest below $416 is an obvious strategy to stay out of tax trouble (and to avoid the cost of preparing a tax return for the child).

Example – child savings account – parent operates as trustee

Raymond, aged 14, has accumulated $7,000 over the years from birthdays and other special occasions. Raymond’s mother has placed the money into a bank account in his name, which she operates on his behalf. Raymond’s mother does not use the money in the account for herself or others. Raymond earns $490 in interest during an income year.

Raymond has beneficial ownership of the money in the account and is therefore assessable on all of the interest income. The birthday gifts are not assessable income.

However, as Raymond is under 18 years of age, he will be subject to higher rates of tax.

If Raymond shows the interest in his tax return for that income year, his mother will not need to lodge a trust tax return.

  1. Whose money is it really?

The latest ATO ruling says that: “Where a parent operates an account on behalf of a child, but the Commissioner is satisfied that the child beneficially owns the money in the account, the parent can nonetheless show the interest in a tax return lodged for a child”. The ATO understands that a parent needs to be a signatory on accounts opened for young children. But the money in the bank account needs to genuinely belong to the child, not just be spent on them. Expenses to do with the child – such as school fees, school camps and sport lessons – should be paid from the parents’ bank account, not the child’s. Where the bank account is opened in the parent’s name under an informal trust account arrangement, control needs to be handed over when the child turns 18. Also, don’t forget to lodge a tax return if it becomes necessary for the child’s bank account. The ATO data-matches with banks and conducts follow-up investigations.

Example – child savings account – child does not have beneficial ownership

Shaun, aged 10, has an account in his name. The account was opened by his mother who initially deposited $7,000 of her own money into it. Shaun’s mother is a signatory to the account, and makes regular deposits and withdrawals to pay for Shaun’s school and other expenses.

Shaun’s mother spends the money in the account as if it belongs to her. She is considered to be the beneficial owner. Shaun’s mother is assessable on the interest income earned from the account.

  1. Should a child have a Tax File Number (TFN)?

Whilst it is true a child doesn’t need a TFN if aged less than 16 years, the bank account is in their name, and the account earns less than $416 interest each income year, a child is nonetheless eligible for a TFN from birth. As noted earlier, practical problems often arise where a parent’s TFN is quoted for a bank account that genuinely contains the child’s own money. So getting in early, applying for a TFN and quoting the child’s TFN where possible can be a good idea.

  1. Children and part-time or casual jobs

Bank accounts are often opened when a child gets their first part-time or casual job. Apart from needing a TFN to lodge a tax return, a TFN also avoids over-withholding of PAYG withholding when the child is paid their wages. The child’s wages are subject to ordinary income tax rates, not the penal tax rates applicable to bank interest. However, if the job is in the parent’s small business, make sure the salary is arm’s length (i.e. reflects what a non-family employee would earn for the same work and hours). A business that pays excessive amounts as wages to relatives will have some explaining to do if the ATO comes knocking. Pocket-money received from a parent or payment for household tasks, such as mowing the lawn, isn’t taxable.

  1. Beware generous relatives!

Problems often arise if a generous relative (often grandparents) gift largish amounts of money into the bank account of a child. Such gifts should be talked through beforehand to avoid penal tax rates on bank interest. For example, it may be better for grandparents to pay for one-off costs rather than deposit money directly into the child’s bank account. Alternative strategies such as insurance bonds or shares may also be a better option. Grandparents also need to be particularly careful to first ascertain the impact their gift might have on their own government pension entitlements.

  1. Family trust distributions

Penal tax rates for children can also apply to family trust distributions made to a child, although special concessions may apply (e.g. for a testamentary trust for a child established as part of the deceased’s will). Parents thinking of establishing family trust arrangements should get professional advice.

  1. Watch out for bank fees and look for good deals

Not all bank accounts are the same. Seek out the many low fee accounts available from banks for their young customers. Some also offer incentive interest rates (e.g. if no withdrawals are made for a specified period). Consumer group Choice has a useful website for choosing a suitable bank account.


This is an excerpt of an article originally published by Chartered Accountants Australia and New Zealand. Access the original post here.

The information in this article is general in nature. It does not take into consideration all your personal financial information, goals or objectives and is designed to bring your attention to the various options that may impact you. Please ensure that you seek the appropriate financial and taxation advice. Please contact us to discuss your personal situation in more detail.