When putting away money for a child, many people invest directly in the child’s name or on behalf of the child using managed funds or other options where the investment is held in the adult’s name ‘as trustee for’ the child. This usually results in the creation of an informal trust arrangement. When making a decision in relation to the appropriate ways to invest for your children, it is important to consider the following key thoughts:
- What is the purpose of the investment and the investment time horizon
- Have you thought about your tolerance to investment risk?
- What will your ongoing taxation look like?
- Do you have a date in mind of when access to the investment will be opened?
- Have you thought about how much control you’d like to have over the funds?
- Do you have much investment knowledge?
When investing for a child, there are a number of factors which will determine whether the income is taxed in the hands of the minor, the adult investing on the child’s behalf, or the trustee of a trust of which the minor is a beneficiary. This can become very complicated, so it’s important to remember to talk to your financial adviser before making any decisions.
Where the income is assessed as being derived by the child, the rate of tax payable by a minor depends on a number of factors, including:
- the source of the income, and
- personal circumstances of the minor, including employment status, and whether or not the person has a particular kind of disability.
Generally, income earned by a minor is taxed at special minor rates which are higher than adult rates, unless any of the above applies, and either the income is ‘excepted income’ or the minor is an ‘excepted person’. Unearned income derived by minors is generally taxed at the higher minor rate, except in special circumstances – talk to you financial adviser for more information on this.
The higher tax rates below apply to unearned income, which is generally passively derived income such as:
- distributions from managed funds, and
- distributions from discretionary trusts.
Your investment options
There are a number of options available to you if you’re considering investing for your child. The main options include:
- Cash-based accounts
- Direct Australian Shares
- Managed Funds
- Scholarship education bonds
- Insurance bonds
These are the most common types of investment, however, some alternative options include:
- Additional mortgage repayments
We understand that investing for children can be a highly complex financial decision, and we’re here to help you make the right choice. If you’re looking to invest on behalf of your child but don’t know which option will work best for your personal financial situation, get in contact with our office for some expert advice.
Source: MLC Investments – Technical News, ‘Investing for Children’ 23rd January 2018