New parents and grandparents often wish to save for their child or grandchild’s future.  Saving and investing on a child’s behalf can be a great way of securing their future.  Unfortunately, investing for a child is often far from simple, bringing with it a myriad of tax and other considerations.  You will need to decide not only where to invest, but in whose name.  For most parents though, investing on behalf of their children is part of a long-term strategy which typically means less risk and volatility over the life of the investment.

 Investment options

Owing to the generally long-term investment horizons when investing for a child, there are many different options that you can consider. 
>  Online savings accounts: 
these are very simple to set up and operate.  Currently, these types of accounts pay interest of around 6% which makes them very attractive.  Term deposits may pay more than this depending upon how much you have to invest and your investment timeframe.  Accounts can be set up as a trust account in the name of a parent or grandparent but will need to be transferred to the child when he/she turns 18.  Being a savings account, your money is at call (except in the case of term deposits), however access to this money may lead the ATO to consider any interest income on your tax return.

>  Insurance bonds:  essentially, insurance bonds are a life insurance policy.  If an adult is the policy owner, and a child is nominated as the life insured, ownership of the bond is transferred automatically to the child at a pre-nominated age (generally between ages 10 and 25) without capital gains tax (CGT) being payable.  The trustee has
control over the bond until the child reaches the nominated age.  Earnings from investment bonds attract tax at 30%, however dividend imputation can reduce this to 24% or less. 

>  Shares and managed funds:  whilst dividends and distributions from shares and managed funds are typically lower than the interest rates of savings accounts there is the possibility of capital growth of the investment.  Many people choose to hold shares in their name on behalf of a child and transfer ownership when the child reaches age 18.  Capital gains tax does not apply until the shares are sold.  Most managed funds require an adult to act as trustee on the investment on behalf of the child and to provide their own tax file number.

Tax considerations

Investing on behalf of your child brings with it some tax implications which need to be carefully considered.  High tax rates apply on income earned from children’s savings and investments.  These were introduced to prevent parents from diverting some of their income to their children’s account to avoid paying tax.  Where a minor earns income from employment this is excepted, however “unearned” income such as those from trust distributions etcetera are taxed at particularly high rates.  Children can make up to $3333 in unearned income before they are liable to pay tax after taking into account the low income tax offset, but children who earn more pay tax of up to 66%:

One way to reduce the tax burden of a child’s investment is for a parents or grandparent to hold the child’s investment for them in trust.  Typically the trustee will be on a lower marginal tax bracket which will dramatically reduce the tax payable on the investment.  Of course, every situation is different so you should seek expert help from one of our financial planners to help you understand the tax implications and alternatives for your personal circumstances.

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2 Responses to “Investing for children”

  1. Derek Stalley January 2, 2013 at 5:29 pm #

    I am interested in learning more about creating a trust fund structure for my children. Could somebody revert so I can discuss further.
    Kind Regards,
    Derek

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