Q: I have read various headlines over recent years about parents buying property for their young children. If I wanted to buy a property for my 8 year old daughter, can I do this?
A: A minor is anyone under the age of 18. Under Australian law, minors can own property in their own name. However it is not as simple as turning up to the auction and having your child scratch their signature on a contract, there are short and longer term issues you need to consider.
Whilst legally a minor can buy property, a problem can arise in having a vendor enter into a contract to sell a property to a child. A minor is deemed to lack capacity to understand or enter into a contract and therefore cannot be bound by the contract. Unlike a contract with an adult, a vendor runs the risk of not being able to enforce the contract with a minor or keep the deposit paid in the event that the child cannot settle the sale.
The same issues arise if your child was to sell the property. Most states require the age of the owner to be noted on the Title Deeds so a purchaser is aware if they are entering a contract with a minor. In Victoria a minor must first obtain a court order to enable the child to sell a property.
A similar issue arises when it comes to mortgages. A mortgage contract with a minor may not be binding on the child. Accordingly any mortgage offered by a lending institution to buy a property for a minor most likely will include some form of guarantor arrangement by the parents, usually incorporating the parent’s property as security. Alternatively parents can act as the “bank” and lend the money to the child either personally or from a Family trust. But not from a Self-Managed Superannuation fund where this is specifically prohibited.
An alternative to direct ownership by the child is ownership via a Trust. An adult or guardian can hold the title for the property as a Trustee for the child. The adult Trustee will be able to borrow money against the property and deal generally with the property for the benefit of the child. Care needs to be taken in how you structure the trust as with some trust structures, transfer of title to the child at some stage in the future may trigger a change of beneficial ownership and possibly lead to Stamp Duty and Capital Gains tax liability.
Income earned from a property is classified as unearned income. Unearned income for minors is taxed at the top marginal tax rate of 47% if the taxable income is greater than $1,307 a year. Minors are entitled to claim the usual tax deductions associated with operating an Investment property such as management fees, repairs, interest costs. However unlike adults, children do not have the same low or no tax thresholds, so tax could prove expensive until they are no longer considered minors and taxed as adults.
A key issue is the matter of control and when the child is able to make decisions in relation to the property. If you buy a property in the child’s name, when they attain age 18 or whatever date a trust deed determines appropriate, they are able to do whatever they want with that asset. So consider carefully whether you would want an 18 year old having that level of responsibility and control of an asset you have effectively gifted to them.
Whilst well intentioned to get your child into the property market, you need to ensure that you consider all of the issues that you face now and also issues that you and your child may likely face into the future.