Tax on Interest (17/18 Year Old)

LReavergy on 17/12/2018 - 10:06

Dear All,
I am currently 17, turning 18 in September 2019 and have saved a considerable amount. I would like to earn interest on this but avoid paying tax on it.
I believe I have a plan that will allow me to do this effectively - just am not sure if it is 'legit'

Since un-taxed interest while under 18 is $416 - put ~$10,000 into BOQ fast track starter account @ 4% to earn ~$400 interest over the year therefore staying under the threshold.
Put the remainder of my savings in a term deposit of 1 year from ING @ 2.85% that pays at maturity. At maturity, I will be 18, so my understanding is that I will not have to pay tax on this because I will have up to $18,200 tax free capacity.

I would really appreciate opinions on this!
Thanks!!

Financial

Comments

  • Baysew on 17/12/2018 - 10:18
    +2

    First question is, were you working when you saved up?

    • Reavergy on 17/12/2018 - 13:26

      Yes, it was from working and christmas gifts, birthday gifts from relatives etc

      • HighAndDry on 17/12/2018 - 15:21
        +1

        Money earned from working is "excepted income"

        Even if you are not an excepted person, some of your income may be excepted income. This means it is taxed at the same rates as if you were an adult.

        Just an FYI - this includes:

        It also includes:

        income from the investment of any of the amounts listed above.

  • [Deactivated] on 17/12/2018 - 10:34
    +1

    Is Christopher Skase a relative of yours?

    • [Deactivated] on 17/12/2018 - 11:02

      was

    • Reavergy on 17/12/2018 - 13:28

      How'd you know???!!!

  • Scrooge McDuck on 17/12/2018 - 11:24

    Your plan is sound, so long as you didn't earn any other income in FY18/19.

    But 2.85 % is a crap rate. Look into investing in a low fee index fund with SelfWealth, brokerage is only $10 for any trade size.

    • Reavergy on 17/12/2018 - 13:27

      I need it to get a term deposit so that im not earning the interest until I am 18 though

      • Scrooge McDuck on 17/12/2018 - 14:54

        Investing in a low/no dividend asset will have the same effect — your returns will be mainly/entirely capital gains.

  • HighAndDry on 17/12/2018 - 11:28
    +5

    Google "marginal rate".

    You'll never make less net after-tax money by increasing total income.

    For example:

    If you make $416, you pay $0 tax, and take home $416.

    If you make $516, you pay $0 on the first $416, and then 66% on the $100 over that (=$66), and you take home $416 + $34 = $450 (which is still more than $416).

    This is also the worst case scenario that you didn't work and didn't earn "excepted income" which gets taxed at normal adult rates (which work the same way, just with lower rates).

    • Reavergy on 17/12/2018 - 13:27

      Yes but I was trying to avoid that 66% tax rate. Thank you for your reply :)

    • Scrooge McDuck on 17/12/2018 - 15:15
      +3

      You'll never make less net after-tax money by increasing total income.

      Not within one financial year, but due to our progressive tax rates, distributing income poorly across multiple financial years can indeed leave a taxpayer with less money overall.

      Particularly so in OP's situation where there are significantly beneficial changes in both marginal tax rates and thresholds when turning 18!

      You shouldn't patronise the boy, it seems he knows far more on this topic than you.

      • HighAndDry on 17/12/2018 - 15:19
        +1

        Not within one financial year, but due to our progressive tax rates, distributing income poorly across multiple financial years can indeed leave a taxpayer with less money overall.

        True.

        You shouldn't patronise the boy

        Wasn't patronising - you'd be amazed at how many adults have no idea how marginal rates of tax work.

  • Skramit on 17/12/2018 - 13:28

    OP I assume you have read this:

    https://www.ato.gov.au/Individuals/Investing/In-detail/Child…

    If your child is:

    16 or 17 years old, earns $120 or more from their savings account per year and
    provides their TFN, the financial institution will not withhold tax
    doesn't provide their TFN, the financial institution will withhold PAYG tax at 47% and they need to lodge a tax return if they want a refund.

    Amount of interest earned
    The amount of interest applies to the total interest earned – not just the amount above the threshold ($420 or $120, depending on their circumstances).

    • Reavergy on 17/12/2018 - 13:30

      Yes but I would still have to lodge a tax return and if I earn over $416 in interest (I would) then I would have to pay tax on that. I have just found out from the ATO (called them a second time) that when I turn 18, that whole financial year is at an adult rate.

  • Phyph on 17/12/2018 - 17:27

    With that account doesn’t the 4% rate only apply to the next month if you deposit $200 in the pervious month?

    https://www.boq.com.au/personal/banking/savings-and-term-dep…

    And the starting rate for the first month is the base rate, ie 0.5%.

    So if I am reading this right then if you deposit $10,000 on Jan 1, you will earn 0.5% for Jan, then you will need to add $200 each month to achieve the bonus 3.5% but also withdraw $200 to avoid going over $10,001. This should generate @ $170 in interest.

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