Investor Education > Managed Funds > Investing for children
INVESTING FOR CHILDREN
It is common for parents or grandparents to want to set aside savings for their children or grandchildren - for a range of reasons including their education or to help with an eventual house purchase. However, investing on behalf of children can be complex due to limitations in being able to hold investments in the name of a minor and taxation penalties on the investment income of children. These penalty rates apply to discourage adults from hiding their own money in a child's account to avoid paying tax on earnings, and apply to eligible income derived from dividends, interest, royalties and property.
THIS IS NOT TAX ADVICE. TAXATION ADVICE SHOULD BE SOUGHT.
Tax effective investment options
One way to avoid this complexity is through an investment held via an investment bond which have unique tax treatment that make it simple to invest for a child whilst retaining. Investment bonds offer access to a variety of investment options managed by investment professionals across various asset classes such as cash, fixed interest, property and shares, just like managed funds.
Investment bonds are tax paid investments, with tax paid on the investment earnings at a fund manager level (at the corporate tax rate which is currently 30%) and earnings do not need to be reported on the investor's annual tax return. Once the investment has been held for 10 years the earnings are also not required to be declared in the investor's tax return and no additional tax would be payable. Where the 10 year rule has not been satisfied before a withdrawal is made, all earnings are taxed at your marginal tax rate and the tax already paid by the fund manager can be used to claim a tax offset. A reduced tax treatment applies where the withdrawal is made during the 9th and 10th years.
Under the 125% Rule, additional contributions of up to 125% of the previous year's contribution may be made without affecting the tax paid status of the bond. Additional contributions made under the 125% Rule will acquire tax paid status 10 years after the initial investment was made (rather than 10 years after the additional contribution). It is important to note that if no contribution is made in a given year, no further contribution can be made without restarting the 10 year period, and if the 125% rule is breached then the 10 year period is restarted.
An investment bond can be held on behalf of a child through a 'Child Advancement Policy'. Under the Child Advancement Policy, the adult as the policy owner can nominate a future birth date that falls between the child's 10th and 25th birthdays known as the vesting age when the ownership of the transfer can be transferred to the child and no stamp duty is payable on the transfer. At the time of application the nominated child needs to be less than 16 years old, and if no vesting age is nominated then the transfer automatically occurs when the child turns 25. Prior to the child reaching vesting age, the policy owner has full control over the investment, and is able to transact and make changes as they wish.
Click here to browse investment bonds via 2020 DIRECTINVEST.