by simon tarrant, private client adviser
Raising children is one of the biggest expenses parents will incur and while love knows no bounds, it’s prudent to prepare financially, whether this is for future education expenses or to give them a solid start in adulthood. However, investing for minors can be complex, particularly regarding tax implications.
investment options for minors
| INVESTMENT | ADVANTAGES | DISADVANTAGES |
|---|---|---|
| Direct Shares | Potentially fully franked dividends Imputation credits help offset tax Some shares have a Dividend Reinvestment Plan | Generally can’t be invested in child’s name Income may add to parent’s tax Not cost effective to add to in small portions unless Dividend Reinvestment Plan |
| Managed Funds | Initial investment can be from $1,000 (usually $2,000 or $5,000) Monthly investment from $100 Reasonable entry fees for small investments Excellent spread of underlying assets for small sum of money invested Reinvestment available for distributions Easy to manage | Generally can’t be invested in child’s name Income may add to parent’s tax Potential realised capital gains Fund manager fees vary |
| Investment Bonds | Tax paid by bond manager not investor Tax deferral Switch investments without capital gains No additional tax paid on withdrawal after 10yrs Flexibility to use funds for other purposes | Nominal tax rate of 30% may be higher than personal tax rate Tax will apply if bond is redeemed early |
| Self Funding Instalment Warrants | Potential for higher returns due to internal gearing Potential tax benefits via deductible interest and fully franked dividends Dividends are used to offset Instalment Payments – “set and forget” investment structure | Higher risk/volatility due to gearing particularly in the short–term Interest rate is variable, so could change during the life of the Warrant |
Understanding Tax Considerations
- Child Tax Rates are designed to discourage parents from reducing their tax burden by investing in their child’s name.
- Income exceeding $416 attracts punitive tax rates, reaching up to 66%.
- There are a number of exceptions including excepted persons and income, those with disabilities, employment income, lottery winnings and income from deceased estates.
Strategies for Tax Optimisation
- Use of Testamentary Trusts: Effective for optimising taxation on inherited assets.
- Use of Formal Trust Structures: May be effective for larger assets or complex financial situations.
Practical Investment Strategies
- Consider the income levels for potential investments and the tax implications for minors.
- Utilise a low–tax trustee.
- Set up an investment vehicle including a trust or education bonds for tax efficiency.
- Dollar–cost average your investment. This will help smoothing market fluctuations and reducing overall investment costs.
- Make regular contributions. This will assist in the long–term growth of your investment portfolio.
Investing in your children’s future requires careful planning and consideration. While the journey may be complex, the rewards of providing a solid financial foundation for the next generation are immeasurable. By navigating these challenges wisely, parents can maximise the potential of their children’s tomorrow.
Simon Tarrant (AR: 001270872) is a Private Client Adviser at Morgans Financial Limited (AFSL 235410 /ABN 49 010 669 726). Simon is passionate about creating quality financial strategies that are tailored and customised to a clients’ lifestyle, financial goals and risk profile. Disclaimer: While every care has been taken, Morgans Financial Limited makes no representations as to the accuracy or completeness of the contents. The information is of a general nature only and has been prepared without consideration of your individual objectives, financial situation or needs. Before making any decisions, you should consider the appropriateness for your personal investment objectives, financial situation or individual needs. We recommend you see a financial adviser, registered tax agent or legal adviser before making any decisions based on this information.