Investing on behalf of your child

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While not necessary, investing on behalf of a child can make a huge difference in their future. However, investing for your child can be quite complex. It is important to understand who is responsible for paying tax on the investment, and what tax rates apply - especially with the punitive tax rates for minors in Australia.

How it works

Even though the Australian Tax Office (ATO) says it's possible for those under 18 to own shares, many brokers will not allow you to buy shares in your child’s name.

When money is invested for a child in a bank account, term deposit, share, or managed fund, the parent guardian is usually the owner of the investment, also known as the ‘trustee’ for the child. The taxation of the investment income is greatly dependent on who is using the income for investment.

If the source of the money comes from the trustee (the parent or guardian) and they also use the investment income, they will usually be known as the owner. Thus, they will be required to include the income when they file their tax return. If the trustee transfers the investments into the name of the child once they become an adult, a capital gains tax may be applied.

In the case where the trustee reinvests the investment income for the child, then the child may be deemed to be the beneficial owner. In this circumstance, the child will pay tax at a penalty rate. This also means that capital gains tax may not apply when the investment is ultimately transferred into the name of the child.

Investing in your name

Those under the age of 18 have high tax rates when it comes to earning income. These rates can be up to 66 percent. 

The following table shows the tax rates for those under 18:

However, not all the child’s income is subject to these punitive tax rates. If your child earns income from employment, money inherited from a deceased person’s estate or family breakdown, or if they are permanently disabled, the penalty tax rates above do not apply.

Considerations

While investing in your child’s future is beneficial, understand that it is not an expectation for every parent. It is important to know the risks involved and consider important factors such as the following:

IMPORTANT NOTE: This information is general advice only and does not take into account your personal circumstances, goals and objectives. Therefore, you should consider its appropriateness for your circumstances before acting on this information.

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