Tax and children’s investments

Posted on 11. Jan, 2011 by admin in LifeStyle Planning

Every parent, and grandparent for that matter, wants the best for their children, so if you are in a position to invest money specifically for your children’s future, you should follow the same approach as if you were investing for yourself. 

The first step is to clearly identify why you are investing, then set yourself a goal and then put the strategy in place to achieve that goal. Your strategy needs to suit your circumstances, risk tolerance and investment time frame.

Whether you have short-term goals and want a high interest earning savings fund or you have long-term goals with a focus on managed funds, one taxing question is ‘Whose name should the investment be held in?’.

Children are taxed at penalty rates on unearned income. For the 2010/11 financial year, children can effectively receive up to $3,333 of income, tax-free. For example, a $47,000 investment earning 7% in the 2010/11 financial year would be tax-free if held in the child’s name.

There are other tax-effective investment options available:

 
§  Investment bonds – income is taxed at up to 30% within the bond and reinvested each year. The proceeds of the bond are tax-free after 10 years and the child can be named as the beneficiary.

§  Investments can be held by, and in the name of, the parent on the lowest marginal tax rate. Although all income is declared in that parent’s tax return, the tax payable on this income may be reduced considerably with franked dividends paid from investments in Australian shares.
 
§  ‘Implied trusts’ – the investment is held in the parents’ name in trust for the child. Beware that the investment must be used for the benefit of the child, otherwise the Australian Taxation Office can attribute the income to the parents and tax them personally.
 
Source | IOOF

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Richard Brown CPA CFP

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Financial Planning Ascot Vale

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