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8. Large Deductible Superannuation Contributions for Children

We generally recommend children work in the practice once they are age 14 and 9 months. Wages paid will be deductible to the practice and assessable to the children, and the first $6,000 is tax-free. The wages have to be commercially realistic to be deductible, and as a practical matter this means there is a natural limit on the number of hours able to be worked, and hence a natural limit on the amount of the wages able to be paid to the child.

But, once an employee, the child can be superannuated up to his/her limit, which is $25,000 for the year ending 30 June 2010.

Remember the contributions are real, and they vest in the child. They really belong to the child. They do not belong to you. And if the child divorces later in life they will be treated as marriage assets in that divorce. But this is still something to think about.

One client has 16 year-old twins, and they help run the reception on weekends and school holidays. They are paid a market salary for this work and they are also superannuated for $10,000 each year. This is a non-arms length amount, but it’s still deductible, and it’s worth $9,156 in tax benefits to mum and dad each year.

The ATO view

Superannuation contributions for related persons such as spouses and children do not have to be arms length, and the ATO accepts that such contributions do not breach any other tax rules. The ATO’s views are expressed at: Taxation Determination TD 2004/D82 .

Other comments on superannuating children

Sothertons Chartered Accountants¹ have written on this topic as follows:

Why would you want to make undeducted superannuation contributions for your children or grandchildren?

There are a number of reasons why you may consider this, including:

A child may benefit from the Superannuation Co-contribution, which is akin to an investment that guarantees you a 150% return courtesy of the Tax Office;
If you intend to include the child as a beneficiary in your will, contributing at least part of that inheritance to their superannuation now ensures it is not wasted by the impetuousness of youth!
Most young people are reluctant to contribute additional money into superannuation as they prefer to have the money now rather than later. As a consequence they miss out on the benefits of a very effective tax strategy. You will make the hard decision on their behalf and assist in them avoiding an under-funded retirement! and
Such a strategy will create an emergency reserve for the child in the event of hardship (not restricted by age).

There are some obvious downsides to the strategy, including:

Except in some extreme circumstances (e.g. severe financial hardship) the funds will not be accessible until the child is at least 60 years old (also an “upside” mentioned above); and

This strategy may appear extreme but with our ever increasing lifespans, it may mean the child accessing the funds at a point in time when they still have a third of their lifetime left.”

1 http://www.sothertons.com.au/News_LatestNews_june07.htmt