After-school jobs: watch out for high tax rates


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I know a parent who takes "tax" out of his children's pocket money to get them accustomed to the impact of tax on their earnings from jobs when they are older.

It's not uncommon for kids to take a first job without having a tax file number. This means the employer takes PAYG tax out at a rate of 46.5%. But kids can retrieve it by lodging a tax return.

They need a tax file number (TFN). The easiest way to obtain a TFN is through school - often at the school office or through the careers adviser. Each year the tax office receives around 120,000 TFN applications from schools.

The big advantage is kids don't have to provide as many documents to prove their identity because it's confirmed through their school records.

Kids must include details from their birth or citizenship certificate, or their Australian or foreign passport. Schools check the student's details and match school records and send them to the tax office.

Kids' income from part-time work is known as "excepted net income" and is taxed at ordinary tax rates.

With the new higher tax-free threshold, kids can earn up to $18,200 for the 2012-13 year and not pay tax. The low-income tax offset will reduce tax payable on their excepted net income if they are eligible for the offset.

However, the under-18s are hit with high tax rates for non-PAYG income from savings accounts, family trusts and investments.

Any earnings over $416 a year are taxed at higher rates to discourage adults from splitting their income and diverting it to their children. Depending on the interest rate, $416 interest could be paid on an account balance of around $10,000. Once the income is above $416, the child also has to lodge a tax return.

Any income above $416 and up to $1307 is taxed at 66%. More than $1307 and the whole amount is taxed at 45%. For example, if your child's savings and investments earn $4000 p.a., the total amount of income of $4000 is taxed at 45% and $1800 tax is paid.

In some situations, an adult should declare the income received by an associated minor. For example, if you hold your child's savings account in trust and contribute much of the money in your child's savings account, you must include the interest earned in your tax return.

But if your child deposits their own birthday and Christmas money into the account, the tax office considers that the interest earned is in your child's own name - even if you are the signatory to the account.

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Susan has been a finance journalist for more than 30 years, beginning at the Australian Financial Review before moving to the Sydney Morning Herald. She edited a superannuation magazine, Superfunds, for the Association of Superannuation Funds of Australia, and writes regularly on superannuation and managed funds. She's also author of the best-selling book Women and Money.