How to invest for your children or grandchildren

Many families aim to provide a good platform for their children by investing at an early age. It is also becoming more common for grandparents to invest for their grandchildren with the intention of paying private school education.

So what do you need to consider when investing for your children or grandchildren?

Anyone under age 18 is considered a minor for tax purposes and special rules apply. A minor can only earn a maximum $416 from unearned or passive income before they start paying tax at 68%. This income excludes any amounts earned from salary or wages or income from deceased estates. Therefore it is important to ensure you choose the most appropriate ownership structure for the investments.

Ownership structure

Often an investment such as a direct share listed on the Australian Stock Exchange will be in the name of the parent or grandparent with the shares held on “trust” for the child. The benefit of this structure is when the child turns age 18 the shares can be transferred to their name without incurring any capital gains tax. If the shares were purchased by the parent and not in trust for the child a transfer would usually cause a capital gains tax event for the parent.

Note this option is usually not available for managed fund investments. An insurance bond however can be established in the name of a child. Insurance bonds are taxed internally at 30% rather than in the hands of the child or parent.

Another common option for professionals is to establish a type of trust such as a discretionary or hybrid discretionary trust as a way of investing and growing wealth for children’s education.

Tax Implications

Before you can determine who will pay tax on the investment income four questions must be considered:

What is the purpose of the investment
Who provided the funds?
Who has control over the investment?
How is the income used?

Usually if the parent or grandparent has opened the account in trust for the child, provided money for investment and has control over how the money is spent then the parent or grandparent will include the income in their tax returns.

Other Considerations

Grandparents need to keep in mind if they are receiving Centrelink that any money given to grandchildren may be considered gifting. Centrelink allows people to gift $10,000 in a financial year and no more than $30,000 over a rolling five year period without their assets or income tests being affected.

More About -- > Thomas Jacks

Thomas Jacks BCom (Acc), SMSF SpecialistTM, Adv. Dip F.S. (FP)
“I want to be able to assist clients with their investment and retirement planning by providing real strategy advice. It’s my aim to not only help my clients but to educate them by addressing the entire picture” Google Plus