Tax and your Children’s Investments

Tax and your Children’s Investments

Every parent wants the best for their child, so if you are in a position to invest money specifically for your children’s future, you should follow the same approach as if you were investing personally.

Start with clearly identifying why you are investing, set a goal and put the strategy into place. A range of products is available depending on your attitude to investing and the investment time frame. For short-term goals, a high interest earning savings fund may be appropriate and for medium to long-term goals, managed funds and direct shares could be suitable. For longer term goals, a geared instalment program may be appropriate.

One taxing question is in whose name to hold the investment. Children are taxed at penalty rates on unearned income. They can receive income of up to $416 in 2014/15. For example, an investment of $5,942 earning 7% pa this financial year would be tax-free if held in the child’s name.

Other options to avoid the high rates of tax include:

  • Investment bonds where income is reinvested and the life office pays tax at 30%. The proceeds of the bond are tax-free after 10 years and the child can be named as the beneficiary.
  • Investing in the name of the parent on the lowest marginal tax rate. A parent who has no other income could earn around $140,000 in fully franked dividends and pay no tax. A parent already earning $30,000 could earn around $45,000 in fully franked dividends and pay no extra tax.
  • Last but not least, investing in repayments of your mortgage. Whilst this is most unclear path to saving for your children, it is actually quite effective. Paying down your mortgage can effectively provide you with a guaranteed1 after-tax return of 4.7% right now. That’s the equivalent of earning a 7.7% return for an individual earning over $80,000 per year.

There are plenty of options, so talk to your financial adviser about an appropriate solution for your situation and that of your children.

1This may depend on your mortgage product, which may contain fees for additional repayments above a threshold.


About Reuben Zelwer


Reuben Zelwer established Adapt Wealth Management in 2011 to help time poor clients achieve financial freedom. For over 15 years, Reuben has helped professionals, executives, business owner and those approaching retirement make the most of their circumstances by making good financial decisions. Reuben’s professional practice is complemented by substantial voluntary work, which has included setting up financial literacy and savings programs in the local community.