Tax time and family business planning often raise a familiar question for Australian business owners:

“Can I pay my kids through my business to reduce tax?”

It’s a fair question. Many parents want to teach their children responsibility, introduce them to work, and possibly create a tax-efficient structure for the family. Tasks like filing receipts, helping with admin, social media, or basic labour often make it feel natural to bring children into the business.

While this is completely legal when done correctly, the Australian Taxation Office (ATO) applies strict rules—especially when income shifting or trust distributions to minors are involved.

If structured incorrectly, what looks like a harmless family arrangement can quickly become a penalty-tax situation under Division 6AA of the Income Tax Assessment Act 1936.

What Happened?

The discussion around hiring children and distributing income to minors has become increasingly relevant as small family businesses look for legitimate tax planning strategies.

A common misunderstanding is that parents can simply allocate income or pay wages to children to take advantage of lower tax brackets or the tax-free threshold.

However, Australia’s tax system includes strict anti-avoidance rules specifically targeting minors receiving “unearned income.” These rules are designed to prevent income splitting purely for tax benefits.

The key distinction the ATO makes is between:

• Genuine employment income (actual work performed)
• Unearned income (trust distributions, investments, passive income)

Misclassification between these two is where most compliance issues arise.

Why Does This Matter?

Getting this wrong can result in significant tax penalties.

Unlike adults, minors receiving unearned income are taxed at punitive rates once they exceed very low thresholds. This means that income distributed incorrectly through trusts or passive structures can be heavily taxed, often wiping out any intended tax benefit.

For family businesses, this can lead to:

• Unexpected tax bills
• Disallowed deductions
• ATO reviews or audits
• Penalty tax rates applied to income

Proper structuring is essential to ensure that any payments to children are compliant, reasonable, and defensible.

Who Should Pay Attention?

This guidance is particularly important for:

Family Business Owners
Companies and sole traders employing children under 18.

Trustees of Family Trusts
Businesses distributing income to family members, including minors.

Trades and Contractors
Builders, electricians, plumbers, and other trades hiring children for casual or weekend work.

Parents with Investment Structures
Families holding shares, savings, or income-generating assets in a minor’s name.

What Are the Tax and Accounting Implications?

To stay compliant, it is important to separate income into two categories: unearned income and earned income.

1. Unearned Income (Trusts and Investments)

Under Division 6AA, minors receiving unearned income are taxed at penalty rates.

This includes:

• Trust distributions
• Dividends
• Interest income

Tax treatment:

• Up to $416: Tax-free
• $417 to $1,307: Taxed at 66% (shaded rate)
• Over $1,307: Taxed at 45% plus Medicare Levy (~47%)

This means distributing large passive income amounts to children is heavily discouraged and often inefficient.

2. Earned Income (Genuine Wages)

If a child performs real work in the business, the income is treated differently.

They may be eligible for:

• Standard tax-free threshold ($18,200)
• Normal individual tax rates

However, strict conditions apply:

Market Rate Test
You must pay a fair wage based on what an unrelated person would earn for the same work. Overpaying (e.g., $100/hour for basic admin) will be rejected.

Genuine Work Requirement
The child must perform real, necessary, and verifiable work duties.

What Should Business Owners Do Now?

Step 1: Formalise Employment

Create a simple employment agreement outlining duties, hours, and pay rate.

Step 2: Use Market-Based Pay Rates

Check awards or industry benchmarks for age-appropriate wages.

Step 3: Keep Proper Records

Maintain:

• Timesheets
• Task descriptions
• Payroll records
• STP reporting

Step 4: Pay into the Child’s Own Account

Wages must go directly into a bank account in the child’s name.

Step 5: Check Super and Insurance Obligations

If under 18 and working over 30 hours per week, superannuation and WorkCover obligations may apply.

Common Mistakes to Avoid

• Paying “ghost” wages with no actual work performed
• Overpaying children beyond market rates
• Using trust distributions to avoid tax improperly
• Failing to maintain timesheets or payroll records
• Not complying with state child employment laws
• Paying wages into incorrect bank accounts

Frequently Asked Questions

1. Can I legally employ my child in my business?

Yes, as long as they perform genuine work and are paid appropriately.

2. Do children get the tax-free threshold?

Yes, if they earn genuine employment income.

3. What is Division 6AA?

It is a set of rules taxing minors’ unearned income at penalty rates.

4. Can I pay my child $100/hour?

No, wages must reflect fair market value.

5. Do I need payroll for my child?

Yes, STP reporting applies if it is a genuine employment arrangement.

6. Do superannuation rules apply?

Yes, if working over 30 hours per week.

7. Can trust income be split to children?

Yes, but it may be taxed at penalty rates under Division 6AA.

8. Do I need records?

Yes, including timesheets and payroll documentation.

9. Can children work full-time instead of school?

Only under specific legal education or apprenticeship conditions.

10. Can I pay cash?

Yes, but it must still be properly recorded through payroll systems.

Final Thoughts

Employing your children in a family business can be a valuable learning experience and a legitimate way to involve them in entrepreneurship. However, it must be structured carefully.

The key principle is simple: real work, fair pay, and proper documentation.

Anything outside this framework risks triggering Division 6AA penalties and ATO scrutiny.

Need Help With Family Business Payroll or Trust Structuring?

If you’re unsure whether your current setup is compliant, speak with Latitude Accountants.

Our team can help you:

• Structure family employment correctly
• Stay compliant with ATO Division 6AA rules
• Set up payroll and STP systems
• Review trust and income distribution strategies
• Reduce tax and audit risk

📍 Sydney Olympic Park | Marrickville | Melbourne | Loxton
📞 1300 706 597
📧 info@latitudeaccountants.com.au

Disclaimer

This article is general information only and does not constitute financial, tax, or legal advice. Individual circumstances vary, and professional advice should be sought before making financial decisions.