Every parent wants the best for their child, 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 personally.
Start with clearly identifying why you are investing, set a goal and put the strategy into place. A range of products is available depending on your attitude to investing and the investment time frame. For short-term goals, a high interest earning savings fund may be appropriate and for medium to long-term goals, managed funds and direct shares could be suitable. For longer term goals, a geared instalment program may be appropriate.
One taxing question is in whose name to hold the investment. Children are taxed at penalty rates on unearned income. They can receive income of up to $416 in 2014/15. For example, an investment of $5,942 earning 7% pa this financial year would be tax-free if held in the child’s name.
Other options to avoid the high rates of tax include:
• Investment bonds where income is reinvested and the life office pays tax at 30%. The proceeds of the bond are tax-free after 10 years and the child can be named as the beneficiary.
• Investing in the name of the parent on the lowest marginal tax rate. A parent who has no other income could earn around $140,000 in fully franked dividends and pay no tax. A parent already earning $30,000 could earn around $45,000 in fully franked dividends and pay no extra tax, before medicare levy.
• Investing using an ‘implied trust’ where the investment is held in the parents’ name in trust for the child. The child enjoys the tax-free threshold of $6,000 and the parents keep control. Beware that the investment must be used for the benefit of the child or the Tax Office can attribute the income to the parents and tax them personally.
There are plenty of options, so talk to your financial adviser about an appropriate solution for your situation and that of your children.
Call (02) 4926 2300 or email us.
To discuss Tax and your children's investments please do not hesitate to contact the team at Leenane Templeton.