Division 6AA: Tax on Minor Beneficiaries

Division 6AA applies higher tax rates to certain income of children under 18. First establish whether the child is an excepted person, then separate eligible income from excepted income. A trust distribution needs its own source analysis before you choose the return treatment.

Who Division 6AA Applies to

A prescribed person is under 18 at the end of the income year and is not an excepted person. Division 6AA applies to that person. A child who turns 18 before year end falls outside that person test for the year.

An excepted person pays ordinary individual rates on their income. Excepted income is different: it gives ordinary-rate treatment to a qualifying amount received by a child who remains a prescribed person. A student’s part-time wages can be excepted income while their family trust distribution remains eligible income.

Full-time work can establish excepted-person status, subject to the statutory work-history and next-year intention tests. The child must intend to work full time for most or all of the following income year and not study full time. The rules can count qualifying full-time work totalling at least three months during the income year. Work before a return to full-time study is disregarded for that test.

Other exceptions cover specified disability circumstances, the principal beneficiary of a special disability trust and certain double-orphan pension cases. The disability and pension categories have their own eligibility and support conditions. A diagnosis or the death of one parent alone does not establish excepted-person status.

Retain evidence of the child’s age and tax residency. Where an exception is claimed, obtain employment and study records or the relevant pension, medical and financial-support evidence. Record which statutory test those documents satisfy. The ATO’s guidance on income of minors explains the categories.

Separate Eligible and Excepted Income

Classify each income source separately, then allocate the deductions that relate to it. Eligible taxable income is the amount left after the relevant deductions from income subject to Division 6AA. Excepted income also needs its own deduction calculation.

Employment income generally qualifies for ordinary-rate treatment. Genuine business income can qualify, but the statutory limits examine the child’s work, control and contributed capital. A share of a family business’s profit does not become wholly excepted income just because the child helps occasionally.

Investment income follows the source of the invested property or money. Interest on accumulated excepted earnings can qualify. Income from ordinary parental gifts generally remains eligible income where the child is the beneficial owner. First establish who owns the investment income: putting a child’s name on an account does not settle that question.

Trust income requires the separate excepted-trust-income rules. Identify the beneficiary’s share of the trust’s tax net income and how much is attributable to qualifying sources. Ordinary business profits distributed through a family trust do not become the child’s employment income merely because the trustee allocates them to the child.

Mixed-Income Beneficiary Workpaper

This hypothetical workpaper concerns a full-year resident student aged 15 at year end. The student is a prescribed person, with no deductions. The trust amounts are shares of tax net income, supported by the source records discussed below.

Income source	Amount	Classification	Supporting record
Part-time employment	$4,000	Excepted income	Income statement and employment records
Trust income from qualifying inherited property	$8,000	Excepted trust income	Estate transfer and investment records
Trust income from an unrelated later addition	$2,000	Eligible income	Separate contribution and income records
Total	$14,000	$12,000 excepted; $2,000 eligible	Reconciled beneficiary workpaper

Keep the $10,000 trust allocation distinct from the $4,000 employment income. The trustee’s assessment concerns the trust share. The child’s personal assessment can bring the sources together.

Trace Excepted Trust Income

Excepted trust income from an estate-derived trust depends on the originating property and the transactions that follow it. A trust created by a will does not give every later receipt ordinary-rate treatment.

Under section 102AG, the testamentary-trust rules identify qualifying property transferred from the deceased estate for the beneficiary’s benefit. They also cover qualifying accumulations of income or capital. Keep the will and estate distribution records with the trust’s asset records. The broader administration of a testamentary trust is a separate task.

If the trustee sells inherited property and reinvests the proceeds, preserve the records connecting the replacement asset to the estate property. Mixing those proceeds with unrelated capital requires an allocation supported by the actual transactions. Record the acquisition and transfer dates because the restrictions on later additions depend on when assets enter the trust. The statutory testamentary-trust amendments set out that application boundary.

Two Separate Source Records

In the hypothetical trust, source record A holds $100,000 transferred from the deceased estate under the will. The trustee invests it in a separate interest-bearing account, which earns $8,000. Assume the transfer and income satisfy the excepted-trust-income requirements for this child.

Source record B holds a later $25,000 gift from a living relative, unrelated to the deceased estate. A separate account earns $2,000 on that gift. Assume the assets fall within the restrictions on later unrelated additions and no other exception applies.

The trustee makes the child presently entitled to all $10,000 of trust income. In this simplified case, trust income and tax net income are equal. The workpaper carries $8,000 as excepted trust income and $2,000 as eligible income.

Incorrect treatment would label all $10,000 excepted because the trust began under a will. Correct treatment preserves the two sources and applies each amount’s supported classification. Reinvesting eligible income does not turn its subsequent earnings into estate-derived income.

Arm’s-length limits and anti-avoidance rules also apply. Keep evidence of genuine transactions and the reason for related-party payments. A payment deliberately increased to manufacture excepted income can lose that treatment.

Carry the Treatment Into the Returns

A minor’s income classification determines the rates, while the trust assessment rules determine who is assessed. Where a beneficiary under a legal disability is presently entitled, section 98 generally assesses the trustee on the relevant share.

Report the allocation in the trust tax return with the beneficiary’s status and supported income split. Use the applicable year’s beneficiary assessment details and retain the calculation behind the trustee’s tax. An excepted person can still be under a legal disability: ordinary rates do not automatically transfer the assessment to the child.

Where the child has another income source or an interest in another trust, section 100 can also include the trust share in their personal assessment. Section 100(2) gives a deduction from their assessed income tax for the trustee’s tax paid or payable on that interest. The trust assessment provisions prevent treating the trustee and beneficiary calculations as unrelated bills.

Retained income without a presently entitled beneficiary raises a different trustee assessment question, including section 99A. Do not apply the beneficiary example below to that retained amount.

Hypothetical Return Calculation for 2025–26

Continue the student example with one resident trust and no deductions, capital gains, franking credits or foreign income. There are no other trusts or tax-withholding credits. This illustration calculates income tax only. Assess Medicare levy and any separate reporting obligations in the actual return.

For a full-year resident prescribed person, eligible taxable income above $1,307 is generally taxed at 45% of the whole eligible amount. The lower band uses 66% of the excess over $416, subject to the ordinary-rate top-slice comparison. Eligible amounts up to $416 fall under ordinary rates in the relevant resident cases, so the nil result assumes the other income permits it. The ATO’s minor tax rate tables explain that comparison.

The Income Tax Rates Act sets the individual and trustee rates. In this example, $2,000 exceeds the upper eligible-income threshold, giving tax of $900. Ordinary-rate income stays below the $18,200 resident tax-free threshold in both assessments.

Return workpaper	Excepted amount	Eligible amount	Income tax calculation
Trustee assessment for this beneficiary	$8,000	$2,000	$0 on excepted income plus 45% of $2,000 = $900
Beneficiary assessment before trustee credit	$12,000, including wages	$2,000	$0 on excepted income plus 45% of $2,000 = $900
Beneficiary after section 100(2) credit	Unchanged	Unchanged	$900 assessed less $900 trustee tax = $0 remaining income tax

The $900 remains payable by the trustee. The beneficiary credit prevents a second $900 income-tax charge on the same trust interest. The example uses no low-income tax offset to reduce eligible-income tax.

Retain the trust distribution statement and trustee tax calculation with the beneficiary return. Reconcile the $10,000 trust share and $900 credit across both workpapers. Additional trusts, deductions or different residency can change the result and require a fresh calculation.

Resolve an Unsupported Exception

An unsupported exception needs source evidence before you use the ordinary-rate classification. A trustee’s statement that the income is inherited does not establish which property earned it.

If the file contains a will but no estate-to-trust transfer records, request the executor’s distribution statement and corresponding bank or title records. If later contributions appear, obtain their source documents and the investment transactions that generated the income. Reconstruct an allocation where money was pooled.

For a claimed excepted person, resolve missing employment, study or pension evidence against the particular statutory test. Record the supported conclusion and recalculate any affected eligible and excepted amounts. If an exception cannot be established, use the treatment supported by the facts and correct the return workpapers before lodgement.

Finish with a reviewer able to trace each ordinary-rate amount to its qualifying source, then reconcile the trustee assessment and any beneficiary credit. The trust’s name and the child’s relationship to the deceased cannot replace that evidence.