When it comes to helping your children or grandchildren get a financial headstart in life there are so many options available however your generosity could create tax issues down the track. Here we explore this topic from a few different angles, depending on how you wish to help them.
If you want to guarantee that money invested for a specific purpose in your child’s life is used for that intention, there are a number of ways to make sure this happens.
When you look around, there are plenty of investment products aimed squarely at helping parents save for education. Education funds are often referred to as “Education Savings Plans”. These funds can be set up to transfer to the child’s name at an age specified by you. Many charge minimal fees and the money can be used for paying for books and uniforms, repaying HECS debts, and even to purchase musical instruments and lessons.
Due to the increasing difficulty faced by many young Australians in saving enough to afford their first home, assistance from family members is becoming more common. A facility is available which enables parents to help with the purchase at no direct cost to themselves. The “family guarantee” loan allows parents, or another family member, to use their own home as security on a portion of their child’s mortgage, generally to increase their deposit amount.
If you choose to act as a guarantor, be aware of the implications. For example, you may be responsible for the entire loan if your offspring cannot meet repayments. Or even worse, if they default on the loan and the lender sells the property at a loss, you may be at risk of losing your own home.
Another option that places less risk on your assets is to lend your child money to make their deposit. Combining a parent’s loan with the first homeowner grant can make a substantial impact on the life of the mortgage.
Accessing Tax Breaks
Parents may be well aware of the value that spreading income across family members can have when it comes to tax time. But beware. The Australian Tax Office ensures money is not placed in children’s names purely to give Mum and Dad a tax break. For this reason, it applies more aggressive tax rates for passive income invested in the name of a person under age 18. So when setting up any investment in this way, make sure you check with your adviser first.
The key to giving your kids a leg-up is to have a clear objective before you start. With so many options available it can get confusing so be sure to contact us for professional advice.
Sources: ASIC’s MoneySmart website “Saving for your children’s education”; “Loans involving family and friends”.