Many people want to give their children a head start in life by investing on their behalf. However, before you do, it’s important to be aware of the tax consequences you could be facing.
Income tax is levied at a special rate for children whose investment income exceeds $416. If a child under 18 works, their earnings from wages (excepted income) is taxed at ordinary rates. However, any income other than excepted income (ie. investment income) is taxed at the rates below*:
|Investment Income||Tax Rate|
|Up to $416||Tax free|
|$417-$1,307||66c in the dollar|
|Each dollar over $13,07||45c in the dollar|
*Income earned in some categories of minors (excepted persons) is all taxed at ordinary rates.
These rules are designed to prevent adults from avoiding tax on investments by diverting the income to their children. The person who owns or uses the funds of that account must be the person who includes the interest in their income tax return, regardless of whose name the account is held in.
A child can get a tax file number at any age. If a child does not have a TFN, is under 16 and quotes their date of birth, they are entitled to a threshold of $420 per income year on interest before PAYG tax is deducted. Eg. An account with birthday and pocket money and income from a child’s part time job that is only used by the child is seen as belonging to the child.
This threshold does not apply to share investments. If no TFN is declared, PAYG tax will be withheld at 45.5% from the unfranked amount of dividends. Again, the person who rightfully owns and controls the shares and proceeds must declare the dividends or capital gains. Eg. If a parent uses the dividends to pay bills, then it may be argued that the shares are not really held by the child.
There is no one size fits all solution for investing in your child. If you want the best solution for your situation it’s a good idea to speak to your accountant.
by Carol Allan
Carol is a Senior Accountant at Insight Accounting advice. She is a registered tax agent, has a Bachelor of Commerce and Advanced Diploma in Accounting. Carol’s areas of expertise include tax and property advice.
The information in this document reflects our understanding of existing legislation, proposed legislation, rulings etc as at the date of issue. In some cases the information has been provided to us by third parties. While it is believed the information is accurate and reliable, this is not guaranteed in any way. Any advice in this publication is of a general nature only and has not been tailored to your personal circumstances. Please seek personal advice prior to acting on this information.