Q. I have two boys 6 and 3. My wife and I have been putting roughly $46 a month away for them since birth plus money from Birthdays and savings. The funds have grown to approximately $5000. We are keen to grow the funds for their long-term future. Given current bank interest rates, we are open to other investment ideas.
A. Children are not entitled to own bank accounts, securities or Managed Funds in their own name until they attain age 18. Investments need to be held in trust by an adult/entity until they attain a requisite age. Typically parents will be the trustee of funds on behalf of their 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 $1,307, the tax rate is 66%. Beyond $1,307, income is taxed at 45%. In the 2017 tax year, an additional 2% Temporary Budget Repair levy is also applicable. The Medicare levy may also be payable.
As you have a long-term investment timeframe of more than 5 years, I would suggest looking at growth investments with the aim to generate higher rates of compounding return in the longer term.
Growth assets are investments such as shares and property. Whilst growth assets can rise and fall in value, over the long term they typically will outperform the rate of return you receive from bank interest.
For diversification and ongoing management, the simplest way to invest in growth assets would be via a Managed fund. A Managed Fund portfolio can be built to reflect the assets you would prefer to be invested in with a level of risk acceptable to you.
Managed funds can be owned as an Investment trust. Tax is payable on the earnings of the trust by the trustee at their marginal tax rate and the liability exists for Capital Gains tax at the time of redemption. Investment Trusts are usually recommended where the trustee’s taxable income is less than approximately $37,000.
The alternative is to own the Managed fund as an Investment Bond. Tax is paid on earnings within the bond at 30% and after 10 years the proceeds are tax-free on redemption. Investment Bonds are usually recommended for trustees with income greater than $37,000 or for those wanting a simpler solution.
Investment Trusts or Bonds can usually be established with as little as $1,500. Contributions can be made to either Trusts or Bonds on a regular basis via Direct debit or on an ad hoc basis.
I would recommend retaining a bank account for short term banking and savings needs. As the children grow older they can deposit cash gifts, pocket money and income from casual work as they learn to develop savings habits. Look for an account with low ongoing costs and a bonus interest rate if deposits are made on a regular basis.