Fifteen-year-old KFC employee caught out by little-known rule after lodging tax return

A teenage KFC employee slapped with an unexpected tax bill has learned the hard way about a little-known rule that could leave young Aussies with casual jobs out of pocket.

Newcastle teen Riley, 15, earned $6200 while working with the fast-food giant over the past year, putting him well under the $18,200 tax-free threshold. He therefore didn’t expect to see a debt when he lodged his tax return.

But while saving up for his first car, Riley was putting his pay into the same account that he had been depositing cash into from birthday and Christmas presents.

This type of gift money, also known as “unearned income”, is tax-free for minors on sums below $416. However, once a minor’s unearned income exceeds $417, it is taxed at a rate of 66 per cent until it reaches more than $1307. The excess is then taxed at a rate of 45 per cent.

It was only when Riley copped a $50 tax bill after lodging his tax return that he realised the Australian Taxation Department (ATO) had taxed the income from his part-time job as if it was unearned income because he had not differentiated the two types of earnings.

Riley’s dad Trevor Monaghan, a forensic accountant and tax agent, told his son why the punitive tax rate was introduced decades ago.

“I had to explain to him that it’s a special rule to catch parents using their children to save tax, by parking the parent’s money in their child’s bank account,” Monaghan told 7NEWS.com.au.

“Riley couldn’t understand why the government wanted some of his money when he was trying to save for his first car,”

“He knew the tax-free threshold was much higher than what he had earned and he knew his brother had earned more and didn’t pay any tax. He didn’t expect to pay any tax. He’s not against paying tax, he just didn’t expect it”.

Monaghan believes the rule not only limits access to a fair outcome for many young people, but that it is outdated, with the tax-free threshold for unearned income remaining unchanged despite 40 years of annual inflation.

“$416 today buys you a lot less than $416 did back then, so it’s a lot easier to go over the threshold,” Monaghan said.

Agent fees outweigh return

To be correctly taxed, Riley would have had to declare the different income types in his tax return, which is not simple task.

“Some of the money towards the end of the financial year was saved by Riley from his new job at KFC. Some of the interest from then on could be attributed to working and therefore be exempt from the $416 threshold,” Monaghan said.

“But that required a complex calculation to split the account balance between different sources in a spreadsheet on a monthly or even daily basis.

“That kind of complexity should be unnecessary for a 15-year-old to contend with, and the cost of a tax agent to do it would outweigh the tax savings. Access to a fair tax outcome should not be too complex or expensive to obtain.”

To hire an accountant would cost about $200, a fee that does not make sense to pay for a tax bill of $50.

Even Monaghan described the process as complex and, despite his own accounting skills, would rather pay the $50 for his son, rather than calculate the figures himself.

If Riley had deposited the non-taxable income from his KFC wages into a separate bank account, it would have cut out this mammoth task, but not necessarily spared him from his tax bill.

That is because he still would have had to know about the rule, and also known how to differentiate the income types and interest with the correct labels when lodging his tax return.

“In the end I just paid the small amount of tax for him. It wasn’t about the tax, it was about the fairness and the signal it sends to young people who are trying to get started building their future,” Monaghan said.

‘Those with limited resources just have to suck it up’

Digital tax lodging systems are increasingly becoming automated for the individual taxpayer, with the ATO’s myTax offering automated prompts and pre-filled data to minimise data entry.

Monaghan said the accounting community is actually happy with an increase in taxpayer independence, because individual tax returns are not where most tax professionals make money, but he said the simplification of the system is not foolproof.

“The tax system can be too complex and overcomplicated for the average person to get access to a fair outcome,” he said.

“Governments try to close loopholes to catch a few bad apples without considering the complexity it adds to the whole tax system.

“Wealthy taxpayers can afford to be at the leading edge, looking for ways to minimise their taxes, whilst those with limited resources just have to suck it up.”