Investing funds for your children or grandchildren is a great way to help them get a head start in life, but it comes with its own unique set of options and traps to watch out for, writes Renee Hush.
There are a number of things you need to consider when investing for a child and five key questions you should ask yourself before investing.
What is the purpose of the investment?
As with any investment in your lifetime, you should have a clear understanding of why you are investing and the ultimate purpose of the asset. This will have ramifications on some of the other decisions you will make around who control the asset and the type of investment.
You should ask yourself the following questions:
- What are you saving for? Education, home deposit, gift?
- How long do you have (time horizon) to save?
- Do you want the child to get it at a certain age?
- Is there a specific amount you want at the end?
- Do you want to save regularly or have a lump sum to invest?
Summary table of Ownership structure:
Who is to control the asset?
There are number of different ways to structure the ownership or control of the asset. There are implications of each option and these should be carefully considered in relation to your personal circumstance before making a decision.
There are four ways that the investments for children are typically held:
a) Held in the adults name and bequeathed in their Will
b) Invested in the child’s name with an adult signatory;
c) Held in trust on behalf of the child by a parent or grandparent;
d) Invested via a family trust where the child is a beneficiary.
What are the Social Security Implications?
In most cases the investment for a child will impact the income and asset calculations for Social security purposes and you should consider the impact of this both when you hold the asset and when you gift the asset to the child, as you may be caught under the gifting rules.
Over the longer term this could have ramifications in terms of receiving aged pension or other allowances and you should carefully consider this when choosing to invest. There are strategies to help you maximise your entitlement and you should seek advice to get help with this.
What are the Gifting Rules?
Singles and couples (combined) can gift up to $10,000 in any given financial year or $30,000 over a five year period. Any gift in excess of these amounts will be subject to the deprivation rules. All assets gifted in the five year period prior to being eligible for social security will also count.
This means that even though you no longer own the asset it is still counted towards the income and assets tests for calculation of social security payments.
Types Of Investments:
What Type of Investment do I Choose?
Once you have worked through these questions and decided on how to structure the asset, the next choice is what to invest in. There are so many choices from cash to shares and it is important to consider your individual circumstances before deciding on the asset type.
The table below provides you with a snapshot of some of the characteristics of some of the more popular investments used when investing for a child. There are certainly a myriad of others available.
[pullQuote] “ Once you have worked through these questions and decided on how to structure the asset, the next choice is what to invest in”. [/pullQuote]
Types of Investments:
Investing for a child is becoming part of the Financial Plans and strategies for any clients and it is important you understand the ramifications of any investment.
You should seek Financial Advice from a Certified Financial Planner before making any investment decision.
These days, more and more grandparents are helping their grandchildren get a head start by investing on their behalf. This can often be a more complex process than people expect. Australian Taxation Office (ATO) Deputy Commissioner Steve Vesperman says there are a number of special taxation rules you should be aware of before investing on your grandchild’s behalf.
“If you’re planning on investing in shares, it’s important to know that children under the age of 18 with income from sources such as interest and share dividends that exceed $416 have to lodge a tax return,” says Mr Vesperman.
The ATO says in the past, it has been contacted by parents and grandparents who aren’t sure which tax file number (TFN) should be quoted when purchasing shares.
“While you don’t have to provide a TFN when you buy shares, if you choose not to, the company paying the dividend must withhold tax at the top rate of tax on unfranked dividends,” says Mr Vesperman.
There is no PAYG withholding threshold for dividends. The $420 threshold for interest received by a child under 16 does not apply to share investments. If you quote a TFN, any tax on the dividends will be worked out when a return is lodged.
If the shareholder is your grandchild, the TFN quoted must be the TFN of your grandchild.
You have to provide your own TFN if you’re the shareholder acting as trustee for your grandchild and there is no formal trust arrangement. Where you’re the shareholder acting as trustee for your grandchild and there is a formal trust arrangement in place, you quote the TFN of the trust.
It’s the responsibility of whoever rightfully owns and controls the shares, not whose name they are in, to declare the dividends and, when it comes time to sell the shares, declare any capital gains or losses.
For example, even if your grandchild is the shareholder, if you’re the one making the decisions, including decisions on the use of the dividend income, then you’re the one who has to declare the dividend income and include capital gains and losses from the sale of those shares.
Besides investing in shares, you also need to be aware of special income taxation rules for the savings accounts of dependent grandchildren under the age of 16.
If your grandchild’s tax file number is not supplied, the investment body must withhold tax at the top marginal tax rate on interest earnings. Tax isn’t payable, however, until their income, including interest, exceeds the under-18 tax-free threshold of $416.
According to the ATO, a common source of confusion is who should declare the interest earned on the grandchild’s account.
“Simply speaking, whoever owns or uses the funds of the account, should declare the interest on their tax return. No matter what type of account it is or the name of the account holder,” explains Mr Vesperman.
In general, if you’ve provided the funds for your grandchild’s account, and you spend or use the funds in the account as if they belong to you, the grandparent needs to declare the interest from that account in their own tax return.
“For example, Wayne opens an account for his grandson Jack by depositing $5,000. Wayne is signatory to the account because Jack is two years old. Wayne makes regular deposits and withdrawals to pay for Jack’s pre-school expenses. The interest earned from that account is considered to be Wayne’s.”
If funds in the account are made up of money received as birthday or Christmas presents, pocket-money, or savings from part-time earnings such as newspaper rounds and those funds are not used by any person other than your grandchild, the interest earned is the child’s income and if it exceeds $416 it must be declared on your grandchild’s tax return.
“If the amount deposited to the account is considered excessive, we may look at it further to decide where the money came from and whose money it really is,” says Mr Vesperman.
In the case of a joint account, interest earned on an account held in multiple names must be divided equally among all account holders who all must include their share of the income in their tax return.
If you’re unsure whether or not you have correctly complied with the taxation rules, the ATO’s message is don’t wait to talk to them.
“At the end of the day, if grandparents have any concerns or questions, we encourage them to get in contact with us right away.”
You can get in contact with the ATO by calling the personal tax information line on 13 28 61 between 8.00am to 6.00pm (local time), Monday to Friday, or visit ato.gov.au for more information.
Renee holds a Bachelor of Business (Finance and Banking) and both the Diploma and Advanced Diploma of Financial Services.
Renee has been working in financial services for over 13 years, the last seven as a financial planner.
The Financial Planners Association’s main mission is to raise the professional standards of financial planning in Australia, with the aim of protecting consumers from unethical practices and safeguarding their best interests.
To find a certified financial planner, go to fpa.com.au
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