How To Maximise Investments For Your Children
It’s a good idea to think about your children’s financial future and to plan accordingly.
Monies invested directly in children’s names in direct savings plans such as term deposits and most managed funds are not taxed concessionally though.
First, I’ll explain the rules. Then, I’ll offer some suggestions.
Unmarried children under the age of 18 are assessed income tax at a rate equivalent to the highest rate of income tax which is close to half for “unearned” income above $416 each per financial year.
The $416 pa figure is ridiculously low and has reverted to this historic amount originally set in 1983 as Federal Budgets have tightened.
“Unearned” income refers to income from investments, a distribution from a Family Trust or other passive income not as a result of their own “personal exertion”.
Having wages from a casual or part time job is an example of “personal exertion”. The normal tax rates apply to such personal exertion income.
The level of personal exertion income is reported in your child’s income tax return so the Tax Office know how to assess income reported. The Tax Office have the ability to reassess a tax return if there is an error in the disclosure.
The income tax rules seem harsh in this area. And they are.
So, my suggestions for child investments that minimise tax:
1. Use a lower income earner. If there is a low earning spouse in the family make the child’s investments in the name of the child but with that spouse as trustee. Earnings can then be assessed in the name of the (lower taxed) trustee until the child takes control over the investment.
2. Make tax-paid investments. Consider investments where tax is already paid on the investment returns – for instance, invest in assets which pay franked dividends (the tax credit on the dividend is a payment towards any tax).
3. Focus on Capital Gain over income. Make investments for the child where the expectation is more on Capital Gain rather than regular income. This is because any Capital Gains Tax (CGT) arises only on disposal of the asset which you generally control.
4. Employ your child. If you run your own business, consider having the children on the payroll and paying them as employees. Their wages are ‘personal exertion income’ and can be invested on their behalf. You need to be mindful that their wage is realistic for their actual effort. My 14 year old daughter helps with filing and shredding forms and is paid a basic wage for this work. She keeps some of her pay and I then save the balance for her.
Please contact your adviser if you need help with this or contact me by leaving a comment below.