LITO changes - effect on investing for children?

As you know the LITO on unearned income has been removed for children (2011 budget). I am investing for my children (in their names with me as trustee) and it meant that they could earn quite a lot of interest and dividends with no tax, but now they will be hit with 45%/66% tax in the next couple of years. how are other people dealing with this?

 

I'm not aware of any elegant and simple fix for this. As a small tax joke, if your children are orphans, the LITO can be applied to to their unearned income - not a good outcome for you as the parent however!

A couple of solutions that I can think of (not ideal, but could help)

1) Invest in companies that either a) do not pay a dividend b) pay dividends in the form of a Bonus Share Plan (BSP) or c) pay very low dividends and are 100% franked

The reasoning is that most of the value will be carried as a capital gain rather than ongoing distributions. When your children are not classified as minors, they could exit the positions over multiple financial years - obviously being liable for CGT - but possibly at a time when your children's income is low due to study or low paying job. Doesn't help for cash investments though.

Examples could include
a) I can't really think of any ASX shares I'd invest in that pay "no" dividends because mining start-ups aren't my thing. If you're happy to invest on a foreign stock exchange, then a Berkshire Hathaway (NYSE:BRK.B) style investment could fit the bill as it never has paid a dividend and retains value via capital growth.
b) QBE (and some others) can pay dividends in the form of a BSP. Unlike a DRP, a BSP is not considered income - but it plays around quite significantly with your cost base - so be wary.
c) Something like a BHP. Low dividend (due to retention of earnings), fully franked.

Otherwise, maybe just invest in your own name (or partner's - whoever has the lowest marginal tax rate) and 'gift' the funds to your children. You obviously pay the tax - but it is lower than the alternate.

Just a couple of ideas, anyone else have any outside-the-box ideas that wouldn't breach the anti-avoidance provisions?

 

thanks for that. it is along the lines i have been thinking. i didn't state that i prefer to invest in listed index funds (low cost, broad diversification, simple for me to manage) and have been thinking that, ironically, a fund aimed at seniors (high dividends but with lots of franking credits) might be suitable.

 

Index funds are good for low fees; although some have minimum start amounts. I have funds in my own name for my daughter (now 7), in a high yield Exchange Traded Fund - these are traded on the sharemarket and also a high yield share (not much admittedly). At first I chose a Resources Fund but that was a big error, as that crashed about a month later. So its been a long haul but I now have all those initial funds back (+ saving) due to choosing the highest dividend options available.

It helps that I hardly pay any tax though and you'd have your own individual circumstances to take into account.

 

Children can still earn up to $16k or so pa from a testamentary trust or income from a will. see s102AG ITAA 1936.

So one strategy would be to make sure each grandparent has a trust set up under their wills so that if the unfortunate does happen there will be a nice tax effective legacy left for the grandkids.This amount cannot be added to, but there are some strategies to increase the capital and the income.

 

powerjen: problem with investing in our own names as that we pay high or medium tax each year. terryw: the idea (from "give your children one million dollars") is that kids take ownership of the shares as they age. it's almost more about the education than the actual dollar value. so handing it over is not quite the same.

thanks for you ideas though!