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SMSF child member contributions

Discussion in 'Superannuation, SMSF & Personal Insurance' started by Chagoi, 22nd Aug, 2012.

  1. Chagoi

    Chagoi New Member

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    Hi All,

    In the process of learning about SMSF's. Read a small amount about having child member's and being able to contribute 3k/3 years until they are 18. Having a 20 month old son this interests me as he would have 18 k +(compound dividends etc) in super when he turns 18 to get him started. Am I missing something here or is this possible?

    Thanks
     
  2. Superman

    Superman Well-Known Member

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    Yes - it can be done. Just don't have 3 kids as the youngest will miss out as you can only have four members in a SMSF!

    Good way to give them a kick start and have them hopefully taking an interest in super as a wealth creation vehicle from an early age.

    There will be some extra paperwork to appoint you as the parent as replacement trustee until the turn 18. Also be prepared for them to go their own way with their investment choices once they are old enough.

    Once they earn some legit money from PAYG they will probably also be eligible for the co-contribution too.

    Also do some outside of super to further educate and engage them. My mate Scott Paper the barefoot investor has written a bit about this topic - Google it

    SM
     
  3. Chagoi

    Chagoi New Member

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    Thanks for responding SM. What form can the child member contributions take? - can they be from my consessional contributiions provided I stay under the 25k cap or do they have to be non-consessional. Also can the 3k contribution be added to the SMSF when my son is say 2 years old and than again when he is say 3 years and one month old or does there have to be a 3 year gap between contributions.

    Thanks again.
     
  4. Superman

    Superman Well-Known Member

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    Chagoi,

    The general non-concessional cap of $150k applies to all people - even those under 18

    However, the money needs to come from the child themselves - if you make the contribution on their behalf it gets taxed at 15% - so you should have a bank account which is their name (or yours as trustees of the account on their behalf) and the contribution needs to come from that account.

    SM
     
  5. Redwing

    Redwing Well-Known Member

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    Hi Superman

    Outside of Super, how do you purchase shares, managed funds etc with kids savings

    One is approaching $3k with thier bank account (parent as trustee) and I see better opportunities than bank interest
     
  6. Superman

    Superman Well-Known Member

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    Hi Redwing

    Same thing applies to shares as with bank accounts.

    Need to determine who the account actually belongs to (i.e. who reports the income (interest / dividends) and capital gains):

    Children's savings accounts

    Then you need to look at the tax on that income:
    Income of individuals under the age of 18

    With the changes last year, children can only earn a measly $416 of other income (interest / dividends / distributions etc) before getting flogged with extra tax.

    Although, interestingly enough, if a child receives an inheritance, any investment income derived from it is counted as excepted income and tax at normal tax rates - I had forgotten this. Same with income which results from certain other scenarios. Info here from the ATO.

    Ways around it? Still working on that.....maybe have an account which you report in your name (or your wife / partner if they have a lower income) once the income from the child's account gets over the $416

    Also remember franking credits - however paying 66 cents in the dollar once you go over the $416 does eat into the returns.

    Hope this helps
    SM
     
  7. Terryw

    Terryw Well-Known Member

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    Also works with testamentary trust distributions and child maintenance trusts - if you divorce you could set up a trust and have the trust invest and the children receive the proceeds and be taxed at adult rates. Savings the parent paying tax on their income and then providing a payment to the other parent for child maintenance. I think it can apply to insurance proceeds too.
    s 102AG ITAA 1936 is the legislation. Very important section!
     
  8. Superman

    Superman Well-Known Member

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    We tell all our clients to ensure that their Wills provide an option of a testamentary trust and we tell all beneficiaries to take the option when the parent / deceased person passes away.

    Yes Terryw - very important section with great practical application. Which is often overlooked when there is death or divorce.

    SM
     
  9. Terryw

    Terryw Well-Known Member

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    I should also point out that a trust can be set up after death, within 3 years, with the proceeds received from a deceased estate with this money being treated as excepted trust income and taxed at adult rates.