Should pocket money be taxed?

I was dropping my children to school one day last week when a fire engine raced past, lights flashing and sirens wailing. My son piped up from the back seat:

“Who pays the fireman?”

Good question.

While my son might be a little young for a lesson in taxation, he’s not too young to understand that we all have to chip in to pay for the amenities we share –

roads, pavements, zebra crossings, hospitals, ambulances, police, parks and even fire engines.

Put as simply as that, the idea of paying tax makes sense.

I’ve heard of parents who teach their children the hard way – by "taxing" their pocket money. I think a better solution is to encourage children to put a percentage of their pocket money into a savings account, so they can learn about saving at the same time as getting used to handing over a portion of their "earnings".   

Lots of banks offer savings options for young people, like CommBank’s Youthsaver account.  Every month that you put money into your Youthsaver account and don’t take any out, they’ll get bonus interest as a reward for being a good saver!

Understandably, impulsive teens are reluctant to tie up their savings for long periods of time, so CommBank’s Youthsaver is an at-call account giving them access to their money whenever they want. Very useful for snapping up a bargain or buying last-minute concert tickets.

But let’s get back to tax…

For teenagers starting their first job, it can be quite a shock to see what’s left after tax has been deducted at source. As parents, you can help by explaining that the tax-free threshold is currently $18,500, so job starters should receive most (if not all) of their tax back.  

If your child is entering full time employment and earning higher than the threshold, you can offer valuable advice on what sort of expenses are tax deductible, and encourage them to keep all work-related receipts to make a tax claim at the end of the financial year. If you have a good grasp of tax returns, maybe sit down and work through one together.  And if there’s an amount of money coming back, suggest that some of this windfall goes into a savings account or term deposit.

Tax File Numbers are often a mystery to new employees, especially when they’re asked to provide one even for a low-paid Saturday job.

In reality, a TFN means that they’re now considered part of the working community and expected to contribute their share. But it does more than keep track of how much tax they pay.  Tax File Numbers also help the Government see who is eligible for a rebate, benefit payment or pension. While all that might seem a long way off to a teenager, it’s important to understand how the system works.

One of the most frequent questions teenage kids ask their parents is how tax is calculated.  Explain to them that people who earn more pay more, on a carefully calculated sliding scale ranging from no tax at all on an income of less than $18,500 to 45 cents in every dollar over $180,000.

But tell them not to worry just yet.

It’ll probably be a little while before they’re in that bracket.