Investments for Children
The sooner you start, the more you’ll have. Imagine how much that could be if you started investing as a child or if as a parent you started investing for your children?
If I knew then what I know now, I would have started investing so much earlier than I did. So much so that I firmly believe we should be investing for our children/grandchildren. Teaching them to save for their future and to help them learn and understand the power of investing over the long-term.
Whether you are creating a safety net or investing for their education, travel, cars or for them to use for a deposit on their first home, there are several options and tax scenarios that need consideration.
With the exception of bank accounts; investments for children must be set up in either the adults name as “trustee” for the child, or in a formal trust structure. The key differences in whether setting up the investments in your name versus in trust are the taxation amounts and who the actual beneficial owner is. Who the beneficial owner is, relates to who decides how the money is spent, regardless of who the money is spent on, and this determines who gets taxed on interest and income earned.
Another consideration is the tax bracket you will fall into by having additional assets and “unearned income” along with Capital Gains Tax, Centrelink eligibility and superannuation thresholds for those close to retiring. Unearned income is classified as income derived from private means i.e. interest, dividends and distributions and not work.
Types of Investment Options for Children
Savings Accounts & Term Deposits
Saving accounts and term deposits can be set directly up in your child’s name without the need for a tax file number (TFN). Although if you do not supply a TFN, then the bank will deduct tax from any interest earned above a certain threshold. You can apply for a TFN for children under 16 with two forms of ID, i.e. their birth certificate and passport. These are the easiest types of investments and allow for other friends and relatives to make contributions, along with the child being able to deposit their own birthday or pocket money. Sounds easy enough, except you can expected a low return from this form of investment.
Shares are a fun way to start investing for and with your children. And the minimum investment is relatively small compared to other options. They can help select the shares and together you can watch the portfolio perform. Children cannot usually buy shares in their own name and therefore an “as trustee for” arrangement would be considered. Alternatively purchasing these in a trust environment is another option. You will need to consider whether you want the dividends taxed in your own name or as trustee – where child taxation rates may apply.
Minors cannot invest in managed funds in their own name, so the adult can set it up in their name and be taxed at their marginal rate or it can be set-up as a trustee arrangement and child tax rates apply. These are a good alternative to bank accounts as they are professionally managed investments and may have a higher long-term growth potential, in rising markets. However, a larger minimum investment amount is required when choosing this type of investment.
Boring, but relatively safe is how many describe investment bonds. But don’t be fooled, they are not risk free. These are a beneficial investment as the earnings are taxed up to a maximum of 30% within the bond and if no withdrawals are made in the first 10 years then any earnings on the bond will be tax-free. Many investment bonds offer a child advancement policy where you can transfer the policy to the child once they reach a certain age – usually between 16 and 25. Insurance bonds are a tax effective way to save for your children’s future. Although capital growth can be limited in this investment environment.
If you are considering saving purely to fund your children’s private schooling or university, then a suitable option may be by investing in an specific education bond. These are very similar to insurance bonds and are a simple, flexible tax effective way to plan for your child’s future education expenses.
Taxation on children’s investments
For children under 16 special rules apply to the income generated from savings accounts. Unearned income is taxed at higher rates than adult rates and they are unable to claim the low income tax offset if they have received an unearned income. The current taxable amounts on unearned income for minors is in the table below;
When your child starts working or is entitled to earned or excepted income, then that income will be able to claim the low income tax offset.
Once you have established investments for your children, talk to them about their investments and the value of saving. Rather than this being passive future building, they can learn a lot from you and the investments as they grow. There are so many investment options to choose from. And the most appropriate one for your child / grandchild will depend on personal circumstances. To find out which one is best for you, we recommend seeking Professional Advice. To speak with a Modoras Professional about investing for our loved ones, give us a call on 1300 888 803.
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This article is published by Modoras Pty Ltd ABN 86068034908 AFS and Credit License No. 233209. This article contains general information only and is not intended to represent specific personal advice (Accounting, taxation, financial or credit). While every effort is made to ensure that the information is accurate, users must be aware that some information may not be accurate or is no longer current. No individual personal circumstances have been taken into consideration for the preparation of this material. It is recommended that you obtain your own personal professional advice before making any financial or business decision.