Saving and Investing for Children in Australia
Whose Name to Use when Making Investments on Kids’ Behalf
Aug 19, 2009
All parents want the best for their kids. That’s why many parents are eager to start investing for their children’s future as early as possible. The question is whose name should be used to hold such investments? Getting professional tax advice is the best way to determine this as much of it depends on a family’s financial situation.
In general, there are some options parents can look into before deciding whose name to use when saving and investing on their kids’ behalf.
Avoid Investing in a Child’s Name
To prevent parents from avoiding tax by holding savings accounts and investments in their children’s names, the Australian government imposes high tax rates – 46.5% when the interest income earned by children exceeds $420 per year. That’s why parents should avoid investing in a child’s name.
Invest in a Parent’s Name
The easiest and most straightforward option is to invest in a parent’s name, preferably the parent with the lower income. This is because any investment income or earnings are taxed at the parents’ personal tax rate. And that means the lower a parent’s income is, the less tax there will be. This option works even better with a non-income earner parent. In fact, a non-working parent can earn an annual income, including interest and investment income, of $14000 before she is required to pay any income tax.
Invest in a Grandparent’s Name
Another tax effective way to save and invest for children is to do it in a grandparent’s name. Many self-funded retirees probably won’t mind holding additional investments meant for their grandkids’ education as they can withdraw money from their superannuation funds without being taxed once they reach the age of 60.
However, this option is not viable for all grandparents. For instance, recipients of the Age Pension may find themselves on the losing end if their pension payments are cut down as more money planned for their grandchildren is added into their savings. The reason? The additional money in the savings or investments will affect the asset and income tests, which in turn will affect a retiree’s eligibility to receive Age Pension.
Set up Family Trusts
Setting up a family trust can also be a tax effective approach to save and invest for children because all family members can use the tax-free limits of their income tax. In other words, the investment income is spread across the entire family, reducing the overall income tax.
The drawback is that family trusts are rather complex and can cost quite a fair bit to set up and administer properly. This approach is more useful and practical for wealthy families or families with both parents earning high salaries.
When making investments on kids’ behalf, it’s best to speak to a registered tax consultant or account first. But generally, parents should avoid investing big sums of money in the child’s name. Instead, they can consider investing and saving for the child in a parent’s or a grandparent’s name. Wealthier families can also think about setting up family trusts for their children.
Found this article useful? Read also Saving for Children’s Education, Financial Harmony for Couples and Government Benefits for Australian Households.
References:
Field, Nicola. Investing in your Child’s Future. Queensland: Wrightbooks, 2008.
Hely, Susan. “Saving for your Children’s Education” in Money Magazine. Australia: ACP Magazines, April 2006.
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