The Court of Appeal in Den Bosch has recently case There has been some debate as to whether children’s income should be taxed under their father’s tax return. How does the allocation of children’s income work for the purposes of income tax?
Of legal age
The case naturally concerns children of full age. For tax purposes, these are children aged 18 or over. After all, with regard to minor children, the Income Tax Act 2001 stipulates that income received by minor children over whom they have parental authority is attributed to the parent(s). Where several parents have parental authority, the income is attributed to them in equal shares.
The following income earned by minor children is attributed to the parents:
- other duties;
- own home;
- significant interest (Box 2);
- saving and investing (Box 3).
Other income (such as income from part-time work) is taxed at the child’s rate.
Fictitious transaction
The case heard by the Court of Appeal in Den Bosch concerns adult children who are the legal owners of a property. The father is responsible for managing this property. Under the terms of an agreement entered into with the children, he receives a fee of 6% of the rent for this.
The Tax and Customs Administration sees grounds for attributing all income from the property to the father. However, the Court has put a stop to this. The tax inspector has not put forward any facts or circumstances on the basis of which it can be reasonably concluded that this is a sham transaction; that the father is, in fact, the beneficial owner of the property.
Wealth planning
In the context of wealth planning and transfer, it may be worthwhile to transfer property to one’s children and/or to enable them to acquire property (for example, by providing loans, whether or not combined with gifts).
We We’d be happy to go through the pros and cons with you sometime.