Q My wife and I are self-funded retirees. Our first grandchild will be born in 2015. We would like to set up an account or buy an investment fund as a gift for the child. We would prefer that the investment be compounding and in the child’s name. Do we need to set up a trust? Are there any tax issues to be aware of?
A In the first instance, I would recommend a bank account be established for your new grandchild for short term banking and savings needs. As the child grows older they can deposit cash gifts, pocket money and income from casual work as they learn to develop savings habits. Look for an account will low ongoing costs and a bonus interest rate if deposits are made on a regular basis.
Children are not entitled to own bank accounts, securities or Managed Funds in their own name until age 18. Investments need to be held in trust by an adult/entity until they attain the requisite age. Typically parents or grandparents on behalf of the child.
Tax on earnings for minors will depend upon who provided the funds and who controls their use. For bank accounts where deposits are birthday money, pocket money and earnings from casual work, the income is taxable to the child. Minors are entitled to receive income of up to $416 a year tax free. For income between $417 and $1307 the tax rate is 66%. Beyond $1,307, income up to $180,000 is taxed at 45% and beyond $180,000 at 47%. The Medicare levy may also be payable.
With a long term investment timeframe of more than 5 years, I would also suggest looking at growth investments. For diversification and ongoing management, the simplest low cost way to do this would be via a Managed fund. A Managed Fund will invest in a range of assets from Shares to Property and Fixed Interest. A portfolio can be built to reflect the assets you would prefer to be invested in.
Managed funds can be owned as Investment trusts. Tax is payable on earnings on the trust by the trustee at their marginal tax rate as received and liable for Capital Gains tax at the time of redemption. Investment Trusts are usually recommended for trustees whose taxable income is less than approximately $37,000.
The alternative is to own the Managed funds as an Insurance Bond. Tax is paid on earnings within the fund at 30% and after 10 years the proceeds are tax free on redemption. Usually recommended for trustees with income greater than $37,000 or who want a simpler solution.
You need to consider how much control you wish to exert over your Grandchild accessing the funds. If ownership reverts to the child at 18, legally you lose control of the funds at that time and they can do what they wish.
If this is a concern or you are looking to control more substantial assets, a more expensive and complicated option is to establish your own Family Trust on behalf of one or more children or beneficiaries. Ownership of the assets resides with the Family trust and is not time bound by an age unless specified in the Trust Deed.