Understanding Division 6AA – How Kids Are Taxed on Unearned Income

Division 6AA applies when children under 18 receive unearned or passive income like trust distributions, interest, dividends or capital gains. Because the ATO wants to stop income-shifting, this income is taxed at very high rates — up to 66% or even 45%. But if the child actually earns the income (wages, real business income, compensation, deceased estate income), it becomes excepted income and is taxed at normal adult rates. This is why distributing trust income to minors can trigger unexpectedly high tax bills.