Are Children’s Savings Tax-Free in Australia?

Opening a children’s savings account is a great way to start teaching money smarts early. But when interest starts rolling in, you might find yourself wondering: is that money tax-free? The short answer is sometimes – but there’s a fair bit of fine print involved.

In Australia, children aren’t automatically exempt from tax just because they’re under 18. In fact, there are specific rules for kids’ income, particularly unearned income like interest. And yes, the ATO keeps a close eye on whether that bank account in your child’s name really belongs to them, or if it’s a sneaky tax dodge.

Let’s break down how it all works, so you can save for your child without accidentally triggering a tax headache.

Who Actually Owns the Money?

This is where it all begins – who really owns the money in that account?

If you, as the parent, are putting money in and using it how you like (for example, withdrawing it to cover school fees or family costs), then the interest income isn’t your child’s. The ATO sees it as your income, and it should be declared on your tax return.

On the other hand, if the money comes from your child – say, birthday money, pocket money, or even earnings from a part-time job – and it’s genuinely for their use, then any interest earned belongs to them and is assessed accordingly.

Even if the account is in your child’s name, what matters is where the money came from and who’s in control of it. The ATO isn’t fooled by names on an account if the parent’s calling all the shots.

Do Children Need a TFN?

Yes! And it’s highly recommended.

There’s no minimum age for getting a Tax File Number (TFN), and if your child earns income, including bank interest, they can (and probably should) have one.

If a TFN isn’t provided, the bank will withhold tax from the interest earned – up to a whopping 47%. That’s nearly half gone before you even see it. You can claim it back later by lodging a tax return for your child, but it’s far easier to just give the TFN to the bank in the first place.

Even babies can get a TFN, and the application is straightforward.

Tax Rates for Children’s Interest Income

So, let’s say the money belongs to your child, the TFN is lodged, and the bank account is humming along. Is the interest tax-free?

Here’s the catch: kids under 18 don’t get the same tax-free threshold as adults when it comes to unearned income (like interest or dividends). Instead, they face much stricter rules:

• The first $416 of interest in a financial year is tax-free.

• From $417 to $1,307, the income is taxed at 66% on the amount above $416.

• Once the interest hits $1,308 or more, the whole lot is taxed at 45%.

Yep, you read that right. If your child earns over $1,307 in interest in a year, they don’t get to keep the first $416 tax-free – the whole amount gets slugged at the top tax rate.

These rules were introduced to stop parents from shifting investments into their kids’ names just to pay less tax. So unless you’re keeping that interest low, your child might face some pretty steep tax on what seems like a modest return.

When Kids Get Normal Tax Rates

Not all income is treated equally. If your child is working – say, at a part-time job – their wages are considered “excepted income”. This means they can access the usual adult tax-free threshold of $18,200 and won’t be hit with the minor’s tax rates.

There are also a few other types of excepted income, like money from deceased estates or compensation payments. But for most families, the key distinction is that interest from a bank account is not excepted income, so those special kids’ tax rules apply.

In some cases, older teens who are working full-time or have finished school might also be classified as “excepted persons,” which would allow all their income, including interest, to be taxed at normal adult rates. But that depends on individual circumstances.

Tips for Tax-Smart Saving for Kids

Want to grow your child’s savings without losing a chunk to tax? Here are some practical steps:

1. Keep Interest Under $416 a Year

This is your sweet spot. If you can keep interest earnings below $416 annually, your child pays no tax at all. With interest rates rising again, just watch your balances – even a $10,000 account at 4% could generate $400 in a year.

2. Provide a TFN to the Bank

Without a TFN, the bank may withhold up to 47% of the interest. Don’t let that happen. Lodge the child’s TFN when opening the account or contact the bank to add it if it’s missing.

3. Use an Offset Account (for Bigger Sums)

If you’re putting aside a larger amount for your child – maybe $20,000 or more – consider keeping it in your mortgage offset account. That way, you avoid triggering high tax on interest and save on your home loan at the same time.

4. Don’t Dip Into Their Account

If you want the interest to be treated as your child’s income (and taxed accordingly), don’t use their bank account as your own piggy bank. Once the money is in there, it needs to stay there for your child’s benefit.

5. Lodge a Tax Return if Needed

If your child earns more than $416 in interest, or if tax was withheld by the bank, you’ll need to lodge a tax return for them. It’s usually quick and easy, and you might even get some money back.

The Bottom Line

Children’s savings can be tax-free, but only in the right conditions. The ATO has strict rules to stop adults funnelling money into kids’ accounts to avoid tax, so if you’re saving for your child, keep things above board.

Stick to small balances if you want to keep the interest tax-free, lodge a TFN, and make sure the money genuinely belongs to your child. For larger sums, it might be smarter to save in your own name or explore longer-term options like investment bonds or education funds.

Either way, a little planning can go a long way, and help your child’s savings grow without the taxman taking too big of a bite.

Any advice is general in nature only and has been prepared without considering your needs, objectives or financial situation. Before acting on it, you should consider its appropriateness for you, having regard to those factors. Before making any decision about whether to acquire a financial product, you should obtain the Product Disclosure Statement.