TAXING DISABLED CHILDREN
Question: Some of my clients have children that suffer from Down Syndrome and other disabilities like Autism Spectrum Disorder. We attempt, where possible, to treat these children as “adults” so they get the generous adult tax-free threshold.
I am having a problem understanding “what is a child under a legal disability’. Is there anything in the ATO rules that spells this out in black and white?
Answer: I have been doing Estate Planning and Wills for 19 years. The hardest Estate Planning I have experienced is helping an aging Mum and Dad care for their disabled adult child. When Mum and Dad die, they are fearful that there is no one left to continue looking after their child. Being a father myself, it has brought me to tears a number of times because, due to a failure to plan, I have seen these fears come to fruition after they die.
From a tax perspective, the good news is, that the government helps disabled children even while they are under 18 years of age.
First, let’s look at the unfair tax rule that discriminates against minors: Division 6AA Income Tax Assessment Act 1936. Division 6AA states that Australia citizens under 18 years are taxed (after an inital payment) on unearned income at a ridiculoulsy high penalty rate of 66%. This is for “unearned income”, that you may get from a trust. (It doesn’t apply if the minor is actually working at say McDonalds.) Given that, the highest marginal tax rate is only 46.5% that seems a grossly high rate.
However, there are exceptions. These are under section 102AG of the Income Tax Assessment Act 1936. Certain types of income fall outside the scope of Division 6AA. In particular for minors (any person under 18 years of age – whether your children or not) their trust income (unearned income) is excluded if they come within in particular for minors. (any person under 18 years years of age – whether they’re your children or not) their trust income (unearned income) is excluded, if they come within one of the exemptions. One group exemptions are “personal injury”, disease or mental or physical impairment”.
But, what do these words mean? There is only limited guidence on the meaning of the expressions used in Section 102AG. Sadly, the only help given by the Australian tax Office was withdrawn. Taxation Ruling TR 1999/D1. When there is no statutory or judical interpretation, we look to the ordinary meaning of the expression. Where we have no special or technical meaning, we look to the dictionary or daily use of the expression.