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Taxing little tackers

Saturday 17 September 2011

If you have little people in your life, looking after their financial future is no doubt high on your priority list. But beware—even something as simple as putting a little money into their savings account regularly requires forethought, particularly with recent changes to the taxation of income of children under 18.

As of July this year, legislation was passed to remove low income tax offset eligibility for children. In simple-speak, unearned income (such as bank interest, dividends from shares or distributions from family trusts) over $416 per year in a child’s name will be taxed at 66 per cent.

For example, if your child had a bank account in their name earning 6% per annum, the balance of the account could get no higher than $6,930 before the interest earned would start to be taxed at 66%. We know—whoa. You can check out the various thresholds and exclusions here.

Previously, minors could earn up to $3,333 of unearned income before paying tax. The reason for the change: to prevent families from investing in their children’s names in order to avoid paying tax—commonly known as income splitting.

But never fear. There are still plenty of ways to help give the little people in your life a head start financially. It’s just a matter of a bit of research and being smart with your (and their) money.

Consider these three things:

1. Become besties with the tax man

The Australian Taxation Office’s website is, of course, the most trustworthy source of information; you can read about how children’s investments are taxed, be they savings accounts or shares.

2. Be clever with your money

There are plenty of clever ways to invest money for your children—one way you could consider reducing tax is to buy Australian shares paying franked dividends (keeping in mind that shares fluctuate in value so a long term view on your investment could be wise). Australian author Ashley Ormond’s book How to give your kids $1 million each has recently been revised and is worth checking out.

3. Apply the principles of smart investing

Investing for little people involves the same rules as if you were investing money for yourself. That is, setting out goals (and strategies to achieve them) that suit your time frame, risk profile and personal circumstances. However, an extra question you need to ask when investing for someone else is in whose name should the investment be held? As always, if you’re unsure your accountant or financial planner will be able to help you decide.

 

 

Also in Article of the week - What are you worth?

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2 Comments

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jen
1 Oct 2011 at 2:18 pm

Ann
9 Oct 2011 at 11:01 am

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