Investing for minor children is a strategic way for parents and grandparents to help secure their financial future. Whether the goal is to fund education expenses, provide a home deposit, or set aside savings for future needs, there are important legal, taxation, and structural considerations that must be addressed.
Taxation Principles
For taxation purposes, a minor is a person under 18 years old at the end of the financial year. Minors are generally taxed at penalty rates on unearned income such as dividends, rent, and interest. These rules were introduced to prevent tax avoidance through income-splitting. However, some exceptions exist.
Exceptions to Minor Taxation
Minors may be taxed at ordinary adult rates if they qualify as an ‘excepted person’ or receive ‘excepted income.’ An excepted person is someone who:
- Has completed full-time study and is working full-time.
- Has a disability.
- Receives a double orphan pension.
Ownership Considerations
When investing for a minor, the structure in which the investment is held impacts taxation and control. Common options include:
- In the child’s name.
- In a parent’s or grandparent’s name as trustee under an informal or formal trust.
Superannuation for Minors
Minors can be members of a superannuation fund, though they may require a parent or guardian to sign on their behalf. Contributions made on their behalf are subject to the same caps and preservation rules as adult members.
Investing Through Insurance Bonds
Insurance bonds can be an effective way to invest for a minor while avoiding penalty tax rates. They allow for tax-free withdrawals after ten years and can be structured to transfer ownership to the child at a set age.
Social Security Considerations
Investments held for minors may be assessed under Centrelink’s ‘protective trust’ rules, which determine whether assets should be attributed to the child or the adult managing the funds.
Conclusion
Investing for a minor can be an excellent way to provide financial security, but it requires careful planning. Understanding tax implications, ownership structures, and social security treatment is key to making informed decisions. Seeking professional advice can help ensure optimal investment outcomes.