Yahoo Finance Sneaky way Aussies are using kids to dodge tax
Aussie parents using their kids for a tax loophole have been slammed.
Aussie parents who set up trusts for their kids in order to avoid paying tax have been called out by the University of New South Wales (UNSW).
UNSW associate professor Dale Boccabella said Aussie parents and grandparents who took part in the loophole were setting a bad example for their kids.
“The start of the Australian tax year is an opportunity to reflect on the way in which children - some of them very young - are being used to minimise their parents’ and grandparents’ tax, and the message that will send them,” Boccabella said.
“Children are mainly used as taxpayers of convenience by controllers of discretionary trusts - often called ‘family trusts’ - although there are other means as well.”
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How does the loophole work?
The first $18,200 of every Aussie resident's earnings are not taxed. On top of that, the Low Income Tax Offset boosts that threshold up to $21,884 - completely tax free.
“Unused tax-free thresholds are valuable for taxpayers who want to avoid tax. They can divert income to the holder of an unused threshold, thereby turning what would otherwise be a high marginal tax rate into a marginal tax rate of zero,” Boccabella said.
Anyone over the age of 18 gets the full tax-free threshold, so if they have no other income, a trust could give them up to $21,884, on which zero tax would be paid.
However, for young people under the age of 18, the tax-free threshold for distributions from trusts is limited to $416 per year. This threshold was put in place to try to stop children being used as “taxpayers of convenience”.
But Boccabella said there were exceptions that allowed for children under 18 to receive up to $21,884 per year tax-free, including from a trust created by a grandparent’s will.
“In many of these cases, the child never gets the money - it is used by the parents. In many of these, the child doesn’t know they have been allocated the money,” he said.
“The parents treat it as their own, with the ‘payment’ to children being viewed as ‘just for tax purposes’.
“When, and if, these children find out, it is likely to colour their views about the extent to which it is important to be truthful when complying with the tax law.”
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