Key Takeaways
- Investing in a child’s name can trigger penalty tax rates of up to 66% if structured incorrectly.
- In many cases, holding investments in an adult’s name as trustee is more tax-effective and flexible.
- Certain children and income types qualify as “excepted persons” and are taxed at adult rates.
- Ownership, control and conditions attached to investments determine who is taxed, not just whose name is on the account.
- Getting advice early can help families avoid unnecessary tax, Centrelink and future CGT issues.
Why Invest for Your Children?
Raising children is one of the biggest expenses parents will incur and although in most cases the emotional rewards offset the costs, it is still a smart move to put money aside for when the bills roll in, to pay for the children’s education or simply to give them a good start later in life.
However, investing for children can be costly for the adult if he or she is not aware of how the investment is treated in relation to tax. Investing in a child's name can attract a tax liability of up to 66%.
In this update we discuss the more common issues surrounding investing for minors. (Note, we are not tax advisers and recommend specific tax advice is sought from a qualified accountant or tax agent before entering into any arrangement.)
Children and Tax Rates
There are very few options to invest directly in a child’s name without being hit with a punishing tax bill. Child tax rates are designed to deter parents from sheltering income in their child’s name in order to reduce their own marginal tax rate.
Excepted Persons and Excepted Income
Not all children are subject to the punitive tax rates. There are several categories of minors who are referred to as excepted persons and are taxed at ordinary rates.
These include people:
- Who are working full-time, or who have worked for more than three months and are intending to work full-time
- Entitled to a disability support pension or rehabilitation allowance; or someone entitled to a carers allowance to care for them
- Permanently blind or disabled
- Entitled to a double orphan pension
- Unable to work full time because of a mental or physical disability
Certain sources of income are also considered excepted income and are taxed at ordinary rates. This includes:
- Employment income
- Compensation, superannuation or pension benefits
- Income from a deceased estate
- Lottery winnings
- Income from a business or partnership
- Income from a property transferred to the minor as a result of the death of another person, family breakdown or to satisfy a claim for damages for an injury they suffered
Testamentary Trusts and Estate Planning
Tip
A common strategy is to establish a testamentary trust to hold assets and distribute income to minor children who have inherited monies from a deceased estate.
The primary reason being that income distributed from a testamentary trust is taxed at adult marginal tax rates, rather than the penalty rates applicable to minors.
Consider, however, that income derived from the direct investment of capital proceeds received via a deceased estate also receives the same taxation treatment.
This may be a simpler and cheaper alternative to establishing a testamentary trust as the tax outcome is the same.
Ownership of the Investment
In most instances, it is generally more effective for the investment to be in the name of the person putting the money forward, such as a parent or grandparent (as trustee for that child).
This is due to the fact minors are generally prohibited from entering into legally binding contracts and ownership arrangements.
As a result, where money is deposited into a bank account or other investment for a child, it is not unusual for an adult parent or guardian to act as a trustee on the child’s behalf.
For example, the parent of Tommy Smith is Bill Smith. The investment may appear in this name: Mr Bill Smith <Tommy Smith a/c>. It is important to note that this is not a formal legal structure. Bill Smith is the legal owner of the asset.
This type of informal trustee arrangement does not generally involve the establishment of a formal trust deed or other legal document.
A formal trust can be established for the child (or a larger family group) but this involves significant establishment and ongoing legal and financial costs.
These can be warranted when the assets are of reasonable value and income from them may take a child into the highest marginal tax rate.
Advice and assistance on the establishment of any trust structure should be sought from a solicitor or accountant qualified in this area.
Tax File Number (TFN) Considerations
If a Tax File Number (TFN) is not provided at the time of investing, tax at the top marginal tax rate (47%) can be withheld from investment earnings (excluding franked dividends).
Whose TFN should be quoted depends on how the investment is structured:
- If the investment is in the child’s name, the child’s TFN is used
- If held by an adult as trustee, the adult’s TFN is used
- If held via a formal trust, the trust’s TFN is used
Ownership and Tax Implications
If it is established the adult ultimately owns the investment, earnings will be included in the adult's assessable income and taxed at their marginal tax rate.
For grandparents, this may affect eligibility for concessions such as the Senior Australians Tax Offset, Low-income Tax Offset, and Medicare levy. It may also impact Centrelink benefits due to asset testing and deeming rules.
When assets are later transferred into the child’s name, there may be gifting and capital gains tax implications.
The ATO provides guidance on ownership issues in its fact sheet Children's share investments, which focuses on who controls the investment and who benefits from the income.
The ATO cautions:
“If there are large amounts of money or a regular turnover, you might need to examine the ownership of the shares further.”
If a condition is placed on the investment (e.g. the child must attend university or reach a certain age), ownership may rest with the adult for tax purposes.
Strategies for Adults Investing for Minors
Consider whether the child’s investment is likely to generate income above the tax-free threshold over time.
- If no, income may be treated as belonging to the child, but all income must be used solely for their benefit
- If yes, consider a trustee with a low tax rate, a formal trust, or investment structures such as insurance or education bonds
Keeping clear records is essential.
The Value of Dollar-Cost Averaging
Parents and relatives often invest for children through lump sums or regular savings plans.
Regular investments benefit from dollar-cost averaging, where investments are made at different market prices over time, reducing the average cost.
Speak to a Morgans adviser about regular savings facilities and long-term investment strategies tailored to your family.
Get Professional Support
Structuring investments for children involves tax, ownership, estate planning and long-term strategy considerations. Morgans advisers work with families to design investment solutions that align with financial goals while managing tax and compliance risks.
To discuss the most effective way to invest for your children, contact a Morgans adviser near you or explore Morgans’ broader wealth management services.
FAQs: Investing for Your Children
Is it better to invest in my child’s name or my own?
In most cases, investing in an adult’s name as trustee is more tax-effective due to penalty tax rates applied to minors.
Can children legally own investments?
Minors generally cannot enter into legally binding contracts, which is why adults often hold investments on their behalf.
Do children need a Tax File Number to invest?
Yes. A child can apply for a TFN at any age, and failing to provide one can result in tax being withheld at the top marginal rate.
What happens tax-wise when the investment is transferred to the child later?
There may be capital gains tax and gifting implications depending on ownership and control of the asset.
Should I get professional advice before investing for my child?
Absolutely. Tax, trust structures and Centrelink implications can be complex - professional advice helps avoid costly mistakes.
