Join our investing community

Investing for children

Discussion in 'Accounting, Tax & Legal' started by islandgirl, 6th Oct, 2006.

  1. islandgirl

    islandgirl Well-Known Member

    Joined:
    18th Sep, 2006
    Posts:
    118
    Location:
    Middle of beautiful Moreton Bay, Qld
    I've set up some diversified trusts for my 5 yo I started with $5k and then added another $5K from an inheritance I received and have been reinvesting the dividends. His funds are up to over $25K now in 5 years. Because he is a minor I have had to open the accounts in our names in trust for him. What I would like to do is set up some sort of trust were I can buy shares under his (the trust) name and have it build until he is 18. Is this possible?? or would the tax implications be ridiculous.

    Part of the reason for my investing and learning about strategies is so that I can show him. I want him to be fully able to manage his own investments from a young age and not be a 40 something adult just starting out behind the 8 ball.
     
  2. Alan

    Alan Well-Known Member

    Joined:
    15th Aug, 2005
    Posts:
    603
    Location:
    Sydney
    That's an impressive saving record IG. :)

    I continue to try various things with my eldest daughter.......

    She has a weekly savings account at school and when it reaches a certain point we use her funds to purchase some Managed Funds with her as the sub-account. Most of the money will always be in the managed fund but at this stage the return comparision between her MF's and Dollarmite Account is still teaching her a few things.

    If she wants to put any birthday money etc towards her savings I'm willing to match her dollar for dollar. Her choice what she does with these sorts of $$'s though.

    She knows the Managed Funds money can not be touched until she is 18 and my condition of 'helping' is that she can only then buy an 'asset' with the money. If she saves separately for other things such as CD's etc. that's fine but I don't match those dollar for dollar. Hopefully she'll have a deposit for an IP when she's 18.

    Another way she can earn some extra money is by doing a bit of extra homework in her Excel Books etc. I give her 50 cents a page and it's pretty much up to her if she wants to do it. If she does more, she makes a bit of extra money. Her Maths has really improved since we started doing this and we usually sit in the study together listening to a bit of music as we go. She seems to enjoy it most of the time. :eek:

    She wants a new bike for Christmas which we said we'll pay 90% and the remaining 10% she has to earn by doing pages of her Excel Book and or other chores. If she does more, she can get the bike earlier.

    The priority at the moment is on education and a bit of self responsibilty. The actual dollar amounts are a secondary consideration at present. Hopefully that will follow. :)
     
  3. NickM

    NickM Co-founder Staff Member

    Joined:
    20th Jun, 2005
    Posts:
    321
    Location:
    Sydney
    Hi Island Girl
    Unfortunately, as a minor she needs a trustee.

    you could get her a TFN but anything she earns over $772 pa will be taxed at 66%. This threshold increases to approx $1400 from 1/7/07 (have to check the exact amount)

    alternatively you could set up a disc trust and invest through the trust. This will allow you to distribute the profits tax effectively amongst the family members.

    BTW well done and some great returns !
    NickM
     
  4. islandgirl

    islandgirl Well-Known Member

    Joined:
    18th Sep, 2006
    Posts:
    118
    Location:
    Middle of beautiful Moreton Bay, Qld
    So I could set up the discretionary trust and just keep reinvesting the profits so there is virtually no distribution to keep it under the $1000 for tax purposes. That might solve the capital gains issues.
     
  5. Simon Hampel

    Simon Hampel Co-founder Staff Member

    Joined:
    9th Jun, 2005
    Posts:
    4,619
    Location:
    Sydney, Australia
    islandgirl - you will still have to pay tax on the net income the trust generates (or on capital gains) regardless of whether you distribute it or reinvest it.

    But you can choose who will pay the tax - thus minimising the amount of tax paid.
     
  6. islandgirl

    islandgirl Well-Known Member

    Joined:
    18th Sep, 2006
    Posts:
    118
    Location:
    Middle of beautiful Moreton Bay, Qld
    I'll have to put some more thought into it to get the mix right. I am just in the process of setting up a trust for my investing for that purpose. The idea behind my son's trust will be to buy long term growth assets.
     
  7. NickM

    NickM Co-founder Staff Member

    Joined:
    20th Jun, 2005
    Posts:
    321
    Location:
    Sydney
    You could use the same trust.
    Sim is right, reinvesting will not get rid of the taxable income.

    $1,333 is the magic number for the 2007 year for minors
    ie they can earn up to that amount tax free

    Gee along with the $4000 bonus it would almost encourage you to have another !:rolleyes:

    I did say ALMOST !

    Nickm
     
  8. islandgirl

    islandgirl Well-Known Member

    Joined:
    18th Sep, 2006
    Posts:
    118
    Location:
    Middle of beautiful Moreton Bay, Qld
    Believe me....one is enough! Besides I am too old to loose my freedom all over again!

    After much discussion I've decided on a DT that way I can split the income as necessary. Purchasing mainly growth stocks and eventually a property.

    Most of his starting money has come from $1 and $2 coins. I'd put them in a jar and keep banking them. Amazing how that adds up. Combine that with the government allowance and he's a rich little bugger. Hopefully he'll be rich enough to buy me a really good retirement home!
     
  9. Nigel Ward

    Nigel Ward Team InvestEd

    Joined:
    10th Jun, 2005
    Posts:
    1,172
    IG well done on your savings to date!

    Can I suggest that you perhaps think about using a Hybrid Discretionary Trust.

    If you get a well written one (talk to NickM for details), then it can operate just like a standard discretionary trust unless and until you want to borrow. If you never do then there's just some clauses in the document that will sit there unused, but if you do want to borrow it can give you a better tax outcome.

    Shouldn't be much more expensive to establish than DT.

    Cheers
    N.
     
  10. islandgirl

    islandgirl Well-Known Member

    Joined:
    18th Sep, 2006
    Posts:
    118
    Location:
    Middle of beautiful Moreton Bay, Qld
    I've been talking to my accountant today. The thinking is a HDT for myself and a DT for my son. Am going to do some serious reading and research on the weekend to bring myself more up to speed.

    Trying to bend my head around margin lending accounts at the moment and my head is beginning to hurrrrrrttt.. Like they keep saying... So much to learn!!!!
     
  11. Simon

    Simon Well-Known Member

    Joined:
    17th Sep, 2005
    Posts:
    520
    Location:
    Newcastle
    I am looking at this for my daughters too. I want them to each have a MF that they can contribute to and not touch until they are ready to buy a property or such.

    I want them to grow up with the mindset espoused by George Classon where 10% of everything is saved.

    I am looking to match what they invest to add some incentive and give the savings a bit of impetus.

    Interestingly I was talking to my eldest on the weekend about savings and a managed fund and she was worried that it might go down and she light lose money. I tried to explain that over the longer term that was unlikely. This led me to thinking and this fear of loss is what stops many from investing. They would rather lose money to high interest credit or towards a flash car - I am guessing that this is not losing but spending - spending is OK as it is a choice. Losing is bad.

    Is there a fund that doesn't distribute but uses all profits for capital growth? The opposite of the Navra Fund?

    This way there will be no taxable income.
     
  12. Nigel Ward

    Nigel Ward Team InvestEd

    Joined:
    10th Jun, 2005
    Posts:
    1,172
    Simon

    Insurance bonds are internally taxed (i.e. 30% tax is paid by insurance co each year) i.e. the investor pays no tax on the way through.

    You can contribute 125% of the previous year's contribution each year and (from memory) after 10 years the return is tax free on redemption.

    BUT the annual returns are usually pretty bad.

    In my view the best way to do this is to have notional sub-accounts in your family trust. Once your kids are adults then you could just clone the trust for each of them and seed it with the relevant sub-account's assets.

    With respect to the underlying investments, I suspect an index fund or one of the buy-and-hold LICs would have pretty low turnover of shares and hence low realised capital gains...

    But naturally speak to a qualified adviser about these issues.

    Cheers
    N.