A teenage fast-food employee who carefully put aside years of birthday cash has been caught out by a little-known tax rule aimed at preventing parents from sheltering money in their children’s bank accounts.
The 15-year-old, who has been saving toward his first car, made $6,200 working at KFC during the most recent financial year.
He paid those earnings into a savings account that already held several years of modest cash gifts from birthdays and other occasions.
The account earned roughly $500 in interest — a figure that, based on a typical 5 per cent savings rate, suggests his balance was around $9,000.
But when the teenager filed his first tax return, hoping for a $16 refund he planned to spend treating his family to KFC, he instead discovered he owed the tax office $50.
The boy’s father, Trevor Monaghan, a forensic accountant, said his son was furious with the outcome, especially since his brother earned more than him and still received a refund.
‘When he saw he owed money instead, he was like, ”What the f***? Why am I paying tax when my brother earns more than me?”’ Mr Monaghan told news.com.au.
While the teenager’s wages from his job were not the source of the tax bill, the interest earned on savings built up from the years of birthday money and cash gifts triggered the unexpected debt due to a law introduced 43 years ago.
A working teenager was shocked to learn he owed $50 in tax instead of receiving a $16 refund, with his accountant father blaming an outdated law for the surprise bill
The 15-year-old, who was saving up for his first car, earned $6,200 while working at KFC over the past financial year
Under Australian law, the first $18,200 that a worker earns is not taxed, with the young man not reaching that threshold.
However, children earning more than $416 from bank interest or other passive income can be hit with tax rates as high as 66 per cent, before the rate falls to 45 per cent.
The law was put in place to discourage parents from keeping their income in their children’s accounts as a way to lower their own tax bills.
Mr Monaghan felt the ruling was harsh but said it taught his son a lesson.
‘He’s learning that you have to work within the system you’re given and that life isn’t always fair,’ he said.
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‘It’s not even about the $50, it’s the disappointment on his face.
‘He’s asking why the government wants his money when he’s just trying to save.’
However, Mr Monaghan’s biggest issue with the law was that the $416 threshold has remained the same for over four decades and hadn’t changed with inflation rates.
Trevor Monaghan, a forensic accountant, said his son was furious with the outcome, especially since his brother earned more than him and still received a tax refund
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If that wasn’t the case, that figure would now be over $1,350, allowing thousands of teenagers to put money aside for their first car, computers or university without having to pay tax on the small cash gifts received from family.
‘This young generation coming through, how do they catch up?’ he said.
‘If you don’t own a house and don’t have wealthy parents, what mechanisms are there in the tax system for you to build wealth?
‘Everything feels stacked against them.
‘We talk about closing the wealth gap, but the system penalises young people trying to get ahead on their own initiative instead of encouraging financial independence.’
Mr Monaghan also argued that the cost of trying to figure out how much interest his son earned from his KFC job compared to his monetary gifts would be more expensive than the $50 tax bill.
‘We have a system where you need to hire an accountant to help you avoid paying tax on money you legally shouldn’t be taxed on in the first place,’ he said.
‘He doesn’t have the skills to do the daily spreadsheet, I don’t have the time, so in the end, we just pay the tax.’