Income-splitting and Minor Children
11.9. It would be possible to deal with income-splitting between parents and minor children, i.e. children under 18 years of age, in much the same fashion as is being proposed in relation to income-splitting between other relatives. In the Committee's view, however, it is appropriate that their incomes should in general be taxed at rates that take account of the amount of income of their parents. It is proposed therefore that the unearned income of a minor child be taxed at a rate determined by notionally adding his income to the income of the parent with the higher income. The income thus notionally added would, for the purpose of ascertaining the tax on it, be regarded as the top slice of the parent's income with the amount added. Where there is more than one child involved, the total income of the children would be added for this purpose and the resulting additional tax then spread amongst the respective children on the basis of their incomes.
11.10. As a method of dealing with income-splitting, the proposal would have a wider application than measures specifically directed to that end would be likely to have. Thus unearned income of a minor child derived under a trust established by the will of a deceased grandfather would be taxed by reference to the amount of his parent's income.
11.11. The existing provisions of the Act (section 102 (1) (b)) relating to a trust created by a parent for his minor children would be unnecessary. Those provisions have, in any event, been shown to be defective in a number of respects. It seems that they have no application where the trust is created by some person other than the parent and the parent later vests assets in the trust. They are defective, too, in not requiring that amounts under all such trusts for the same minor child, and incomes under trusts for several minor children, be added in one calculation to the income of the parent in order to determine the rate of tax to be applied to the amounts.
― 146 ―
11.12. A number of detailed aspects of the Committee's proposal require consideration. The Committee has, in framing what follows, derived assistance from the model of the provisions of the United Kingdom Income Tax Act relating to ‘Aggregation of Income—Parent and Child’.
11.13. The system should apply only to income of a minor child who is unmarried and is not working in some occupation in an arm's length arrangement. The system is based on a view that it is appropriate to determine the ability of a child to pay tax on his income, by reference to the ability to pay tax of those on whom he normally depends for support.
11.14. The system will not apply to arm's length earned income derived by a minor child, since this would operate as a disincentive to work effort. But it should apply to earned income from transactions not at arm's length. For the purposes of the operation of the system, the latter income should be treated as income from property (or investment income). A minimum amount of such income might be specified which would not be taxed under the system. The purpose of this exclusion would be to limit compliance and administrative costs.
11.15. The United Kingdom legislation makes an exception of income derived from the investment of compensation for personal injuries and some similar amounts. The Committee considers that a similar exception should be adopted in Australia. There should also be provisions excluding the operation of the system when the child has a disability and is resident in an institution. There may be a case for other exclusions, for example where some grave and permanent incapacity is involved calling for special care for the child. The Committee would propose a general provision giving the Commissioner a discretion to relieve income from the operation of the system where he is of opinion that to tax the income at the parent's rate would cause unreasonable hardship.