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

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

Division 6AA is basically the ATO’s way of making sure people don’t put investments in their kids’ names just to save tax.

It only applies to children under 18, and only when they get money they didn’t work for.

Let me break it down in the simplest way possible.

🔹 When does Division 6AA apply?

It kicks in when a child receives income that is passive or investment-related.

Things like:

Trust distributions

Bank interest

Dividends from shares

Rental income

Capital gains

Basically, any money that wasn’t earned from actual work

So if the child didn’t physically work for it, the ATO steps in and applies special tax rules.

🔹 The tax rates for kids are intentionally high

This is the ATO’s way of stopping parents from shifting income into a child’s name.

Here are the rates:

$0–$416 → No tax

$417–$1,307 → 66% tax (yes, very high)

Over $1,307 → 45% tax

So even small trust distributions or investment income can lead to a surprisingly high tax bill for a minor.

🔹 What income is taxed normally? (This is important)

If a child actually earns the money themselves, then they are taxed like any adult.

This includes:

Wages from a job

Real business income the child genuinely earns

Compensation payments

Income from a deceased estate

Certain types of superannuation

This is called excepted income, and it’s taxed at standard rates — no penalties.

🔹 Why people need to be careful with trust distributions

If a family trust distributes money to a minor, Division 6AA almost always applies.

That means the tax rate could be 66% or 45%, which is obviously very costly.

This is why most accountants advise not to distribute trust income to kids under 18 unless it qualifies as excepted income.