I’m often asked how best to invest for children and grandchildren. My clients are looking for the best long-term strategy to provide a gift to their children or grandchildren on their 18th birthday.
The best gift we can give children is educating them about the value of money and the benefits of saving and investing.
Prior to choosing an investment, we need to consider a few aspects including tax, fees and the complexity of the structure.
A major consideration for parents and grandparents is the tax rate children have to pay. To prevent Australians investing money in their children’s name to save tax, special rules apply to income earned by children under 18. Income derived from investments and savings account is taxed at 66 percent once it exceeds $416 a year until it reaches $1,445, after which 47 percent tax applies.
We can safely say that investing in the child’s name will incur the highest marginal tax rate.
The simplest approach is to invest in your own name, preferably the lowest earning parent or grandparent.
- You pay the tax at your marginal rate
- The first $18,200 earned is tax-free
- You may be eligible for the low-income tax offset
- If you meet the age requirements for Age pension, you may be eligible for the seniors and pensioners tax offset
- Income derived from the investment may have franking credits
Another structure that can be used is a family trust, however, they are costly to establish and maintain, and time-consuming to administer.
As you can observe, the decision on the most appropriate investment vehicle for your children or grandchildren can vary depending on your circumstances. It is best to speak to your financial adviser at The Investment Collective.
Please note that this article is provided as general advice, it has not taken your personal or financial circumstances into consideration. If you would like more tailored advice, please contact us today.