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Buying shares in kids names

Discussion in 'Accounting, Tax & Legal' started by Al1979, 24th Feb, 2017.

  1. Al1979

    Al1979 Member

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    I have three kids and have included them in some basic property investment education which they have enjoyed. I am looking at buying them a small parcel ($500 each from their own accounts) of LIC's to get them involved. Ideally I would like to have 50% of dividends reinvested to show them the power dividend reinvestment but also have 50% paid to them so they can see how investing can actually give back to them also. Getting that 50% back will get them a little excited and keep them interested at their young ages.

    Is this possible to do?

    I have an unused commsec account that is attached to my bank accounts so it would be easiest to do it through that if possible? I would want three different "bundles" of shares if possible, one for each child. Is this all possible do you think?
     
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  2. austing

    austing Well-Known Member

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    http://www.afi.com.au/_uploads/244252AFIC_IFC_brochure_Aug_2016_P1.pdf
     
  3. twisted strategies

    twisted strategies Well-Known Member

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    i might suggest $1000 per child , but boy doesn't ATO make life complicated

    but *** Over $1,445 tax = 45% of the total amount ***

    Ritchie Rich didn't live in Australia long did he ????

    you may as well teach the child to be a pro-trader at that tax rate

    absurd tax bracket level ( teaches every industrious tyke to work in the cash economy ,evading tax )
     
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  4. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    We discussed this extensively with our accountant and came to the conclusion that it simply wasn't worth while purchasing in our kids names - despite the psychological benefits in doing so.

    Either purchase in your name with some kind of account designation to separate the accounts (may still be deemed as you holding the investment in trust for the child and thus the child may still be deemed the taxable party) ... or just purchase via the family trust and have the trustees make the decisions about distributions.

    While it would be great to be able to just buy shares in the names of your kids - unfortunately too many people will simply abuse this as tax minimisation strategy rather than a genuine investment in their kids education and future wealth.
     
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  5. Simon Hampel

    Simon Hampel Co-founder Staff Member

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  6. showmethemoney

    showmethemoney Member

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    very interesting topic

    each of my kids has a few grand in lics. its a small amount and they wont receive >$416 so i have left their accounts as is, for now. they are actually all set to drp anyway.

    their accounts are with nab and i am the trustee. i think i am liable for any tax howver should any liability arise. not 100% sure

    perhaps i should look more into a family trust setup moving ahead
     
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  7. twisted strategies

    twisted strategies Well-Known Member

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    depending on which LICs chosen and factoring in the DRP compounding effect you may be amazed ( pleased ).

    PS don't forget the franking credits ( if any )

    i love your concept ( idea ) , it is a shame it is so difficult to set up .( as originally conceived )

    PS. it was a brilliant job by those at AFI to attempt to address the situation

    ( i do not hold AFI )

    i wish you every success
     
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  8. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Pretty sure that if the accounts are like "Your Name <Child #1's name Acc>", then you are effectively acting as the trustee on behalf of the beneficiary (child) and the child may be liable for the tax.

    However, if you are benefiting from the account (eg using dividends/distributions), then it may be deemed as you who is liable.

    Some examples from the ATO website:

    Children's share investments

    Example 1

    Peter withdraws $3,000 from his own bank account to buy shares in the name of his daughter Georgia.

    He deposits the dividend of $200 into his own bank account and uses it for his own personal expenses.

    Peter declares the $200 on his tax return. When he sells the shares, he will also declare any capital gain or loss.

    Example 2

    Simon withdraws $5,000 from his bank account to buy shares in the name of his son Jordan. He quotes Jordan's TFN when he buys the shares.

    Simon makes all the decisions about those shares as Jordan is only three years old.

    All dividend income and any profit from the sale of those shares are deposited into a bank account in Jordan's name with Simon as trustee.

    The dividends and capital gains are declared on Jordan's tax return.

    Example 3

    Jenny buys shares on behalf of her daughter, Talia, with money saved from Talia's part-time job, plus money received for Talia's birthday. Talia and Jenny decide not to quote Talia's TFN.

    Dividends of $300 are deposited in Talia's bank account.

    Talia declares the $300 on her tax return. When those shares are sold, any capital gain or loss from the sale will belong to Talia.

    You and your shares 2013-14

    Shares held in children’s names

    Custodians, such as parents or grandparents holding shares on behalf of minors (under a legal disability), should be treated as the owners of the shares unless the child is considered the genuine beneficial owner.

    If a child is the owner of shares, any dividend income should be included on the child’s tax return. Note that in some circumstances the income of a minor is subject to the highest marginal rate of tax. Any excess franking credits may also be refundable.

    Some other articles that may be of use: Investing for your kids or grandchildren - The Experts | Switzer
     
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  9. Al1979

    Al1979 Member

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    Thanks for the help guys, so completely noob question.... If I just do dividend reinvestment do the kids pay tax on the additional shares they get? Or do they only pay tax if they receive a dividend?
     
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  10. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Even if you don't get the cash in hand, it is still a tax liability and you'll need to declare it and potentially pay tax on the dividend.

    This is where the level of franking becomes important - especially for kids.

    A fully franked share (where the company has already paid tax on the income at the company tax rate) comes with franking credits and if you're on a higher tax bracket than the company tax rate, you'll only pay the difference. If you're on a lower tax bracket than the company tax rate, you actually get a refund.

    So for kids - assuming they aren't above the threshold where they pay ridiculous amounts of tax, they will actually get money back at tax time with fully franked shares.

    If investing in managed funds and such - look for "imputation" funds which aim to pay fully franked dividends.
     
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  11. Terryw

    Terryw Well-Known Member

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    There are a few ways to do this
    a) in child's name directly. I am not sure if commsec etc would open an account in the name of a child, but it is legally possible

    b) parent as trustee for the child. This is a bare trust relationship so the child would be the beneficial owner of the shares and pay the tax. on reaching 18 the child can demand title to the shares

    c) in parents name with some behind the scenes book keeping so there is an informal trust like relationship.

    d) in a discretionary trust

    Option C would probably be best in most cases. When the time comes just sell the shares and the parent wears the CGT and the child can then buy them back in their name or receive the money from the parent.

    Option D is possible where you have a trust set up for shares in general, but probably not worth doing for a few thousand in shares and/or if you have more than 1 child.
     
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