Investment Tax for newborn baby

[smiffy]

Hello eveyone,

Do newborn babies have to pay tax? I would like to setup little pot of gold for my newborn baby and wanted to know if children have to pay tax? I am deciding between shares or perhaps a savings account.

Any advice would be great?
smiffy

 

[alexlee]

<18s are taxed differently to adults.

http://www.ato.gov.au/individuals/content.asp?doc=/content/20046.htm&page=5&H5

However, note that minors still get the low income tax offset.

 

[Hillview]

Minors

Unfortunately children that age are not allowed to sign contracts etc, which is probably a good thing! Therefore the bank, or share etc will go in an adults name, and therefore the interest or dividend included in the adults Tax return.

 

[alexlee]

Unfortunately children that age are not allowed to sign contracts etc, which is probably a good thing! Therefore the bank, or share etc will go in an adults name, and therefore the interest or dividend included in the adults Tax return.

But they are able to receive, say, distributions from a family trust?

 

[Terryw]

Unfortunately children that age are not allowed to sign contracts etc, which is probably a good thing! Therefore the bank, or share etc will go in an adults name, and therefore the interest or dividend included in the adults Tax return.

Not necessarily. The adult would be trustee, in many cases, for the kid and if this is the case it would be the kid who would be taxed - which would not be a good idea for income over approx $3600 pa as then the tax rates would be very high (around 66%).

 

[Hillview]

Childs tax's

Good point Terry....http://www.ato.gov.au/individuals/content.asp?doc=/content/11900.htm&page=3&H3

 

[Mry]

With regards to Children's savings accounts -

IT 2486.

4. Regardless of the name and type of the account, the essential question that must be asked is: 'Whose money is it?'. If the money really belongs to the parent, in the sense that the parent provided the money and may spend it as he or she likes, then the parent should include the interest in his or her return. If it belongs to the child and the child's total income from all sources is less than $416 no tax is payable and no tax returns will be required.

5. The answer to the question 'Whose money is it?' must inevitably depend upon the facts of each case. If, for example, the account is made up of money the child has received as birthday or Christmas presents, pocket-money or money from newspaper rounds, childminding, etc., then the money in the account should be regarded as that of the child.

6. On the other hand, if the account contains a large sum of money careful examination is needed to decide where it came from and whose money it really is. There will be other cases where, although an account is opened by a parent in a child's name, the parent spends or intends to use the funds in the account as if they belonged to the parent. In such cases the money in the account will be treated as belonging to the parent.

So if you open an account / buy shares for your kid and you spend the money as if its yours, you have to declare the interest. If its a true gift to the child and is spent on things relating to the child, its theirs.

 

[WASP]

Unfortunately children that age are not allowed to sign contracts etc, which is probably a good thing! Therefore the bank, or share etc will go in an adults name, and therefore the interest or dividend included in the adults Tax return.

We have bank accounts in the kids names with ourselves as trustees, in fact our parents had similar for us. Lucky you are a number cruncher and not an adviser

Childrens pocket money, loose change, monetary gifts from grand parents and the odd 5c found goes into the account. Once it gets to a couple of Grand it goes into a term deposit

Income or interest earnt over $3,600.00 is a long long way away, so they are safe for many years to come

There are some great on-line savings account Smiffy

 

[Hillview]

CHild savings tax

Just watch out -as MRY has said, and the ATO link confirm, the child will be taxed if the money is truly theirs, and are very heavily taxed if you go over certain taxable income. Also Alex, yes they can receive trust distributions, taxed heavily again if if receiving too much income, however can be useful distributions. Also note these are legal entitlements and therefore the child does have a legal call to them.

If the money is basically the adults, then will be taxed in the adults name.

 

[alexlee]

Just watch out -as MRY has said, and the ATO link confirm, the child will be taxed if the money is truly theirs, and are very heavily taxed if you go over certain taxable income. Also Alex, yes they can receive trust distributions, taxed heavily again if if receiving too much income,

Separate issue. Obviously one looks at the marginal tax rates of the various individuals and entities when looking at the best tax outcome. My point is that minors can receive taxable income. Your initial post seems to imply that they cannot.

Also note these are legal entitlements and therefore the child does have a legal call to them.

True, but if you really wanted to get rid of the entitlement, just save receipts for expenses paid on behalf of the child. Or pay their pocket money out of the entitlements. 3k tax free a year isn't much, but it's something if you already have a family trust structure in place.

 

[Hillview]

Child tax

Hi Alex,

Never had a problem with Trust income, only bank account's/shares. I just wanted it stated that it can be taxed in the adult's name, and incorrectly stated that it would always be in the adult's name. Apologies for the incorrect statement but this is what happened last time I had a child's account as the money was effectively treated as theirs. Happy to stand corrected, and that's why the second third fourth etc posts!

 

[smiffy]

thanks for all your replies.......still unsure as to what to do.

What else would be a good idea to buy my little poppit which will benefit him with a bit of $$$ - besides investing in art.......not really my thing or i can afford :O)

smiffy

 

[alexlee]

What else would be a good idea to buy my little poppit which will benefit him with a bit of $$$ - besides investing in art.......not really my thing or i can afford :O)

Build up your own wealth and teach them how to manage it.

 

[Rob G.]

thanks for all your replies.......still unsure as to what to do.

What else would be a good idea to buy my little poppit which will benefit him with a bit of $$$ - besides investing in art.......not really my thing or i can afford :O)

smiffy

Insurance bonds can avoid penalty rate income tax for children whilst building their wealth.

Or persuade an elderly relative to write the children into a testamentary trust as part of their will.

Of course you have already done this for yourselves.

Estate planning starts before birth and ends 80 years after death !!

Cheers,

Rob

 

[Terryw]

Insurance bonds can avoid penalty rate income tax for children whilst building their wealth.

Or persuade an elderly relative to write the children into a testamentary trust as part of their will.

Of course you have already done this for yourselves.

Estate planning starts before birth and ends 80 years after death !!

Cheers,

Rob

That's a good point. Income of a child received from a deceased estate or testamentary trust is taxed at adult rates, which means up to $16,000 pa tax free per kid. (who says kids cost money!).

Rob, do you have a view on whether money gifted after death to a testamentary trust could qualify to be taxed at adult rates? eg you kick off a testamentary trust with old uncle Jack. He has $100 and leaves it to a trustee to be held for a class of beneficiaries. The trustee then receives a gift of $1,000,000 from Jack's nephew (or maybe even a loan?) who then invests that money and, as trustee distributes $16,000 pa to his 10 kids who pay no tax = $160,000 pa potentially tax free. Would this work, or would only the initial $100 of the trust and the income generate from this be taxed at adult rates?

 

[redwing]

There's a bit of information relating to the original posts below in a recent article, hopefully it assists?

This little piggy made $80,000

And some words of wisdom from one of the good guys; Noel WHITTAKER

If you haven't got his books you're missing out

Train Ride to Wealth On $2.74 A Day

BACK in 1990, when I wrote my second book More Money, I included a chapter called "The Fairy Godmother and the Magic Train". The intention was to show the power of compound interest, and it told a fable about a fairy godmother who visits all new parents to tell them about a train that could take the child to wealth.

The fare to take the journey is just $2.74 a day ($1000 a year) provided the parents start immediately, and the payoff is that the child should have more than $6 million at age 65 which is the end of the journey. The figures are based on the assumption that the money is invested in quality share trusts, and that the trusts earn an average of 10 per cent a year if all income is reinvested.

A seat on the train costs virtually nothing if they start paying that $1000 a year from year one. However, as each year passes its value grows as compounding works its magic. Therefore, a person who delays starting the program will have to pay an increasingly heavy price to join the train if they wish to have the same sum at age 65 for an investment of just $2.74 a day.

Time passes quickly. This month we found ourselves celebrating the 21st birthday of our youngest child. It only seems such a short time since we had three children under four now they are aged 21, 23 and 24.

Yes, the magic train is a great concept unfortunately, like most people, I never got around to starting. However, being one who likes to ponder on what might have been, I did some calculations to find out what the outcome would have been if I had made the time to invest that paltry $1000 a year into a managed fund that matched the All Ordinaries Accumulation Index.


The eldest, now aged 24, would have $164,000, the second would have $122,000 and the youngest, who just turned 21, would have $89,000. Notice the impact of time on the investment. Because the youngest is four years younger than the eldest, her theoretical portfolio would have been worth about half as much as his, because the length of time of her investment would have been four years shorter.

It encouraged me to do some more calculations. If we made no more contributions to the eldest son's $164,000 portfolio, it would grow to $8.8 million at age 64 if the investment could average 10 per cent a year. That's a return of $8.8 million for a total investment of $24,000 (24 years x $1000).

Now think about somebody who is reading this, who is aged 24, and becomes sold on the idea of having a portfolio worth $8.8 million in 40 years time. Because they are starting from scratch they have to invest $1380 a month ($16,560 a year) to reach their target of $8.8 million.


Yes, the person who put away $1000 a year from birth and then stopped at age 24 outlays only $24,000 for a return of $8.8 million. The one who delays the program and then starts at age 24 has to find a staggering $662,400 to end up in the same place. This is the cost of delay.


Naturally this raises the question that we must all ask ourselves: why don't we start these programs? Probably because deep down we all have an active impatience gene that makes us resist any course of action where results only appear over time.

It's easier to choose a harsh lose-three-kilograms-in-seven-days diet than one that requires a slight adjustment to our eating habits that will result in our losing six kilograms in 12 months.

There is also the age-old problem of getting so involved in immediate problems that we neglect planning for the future. Maybe, with a new financial year approaching, it might be a good time to reflect on what we have done in the past 12 months to get some money working for us. Remember, the three main places money can come from are you working, your money working, or from welfare.

Welfare is being continually tightened so if you intend to ever give up work it makes sense to start accumulating some capital for your retirement as soon as you can. The earlier you start the easier it is.


Noel Whittaker is joint managing director of Whittaker Macnaught, AFSL number 246519. Email him at [email protected]. This advice is general in nature and readers should take their own expert advice before making financial decisions.

 

[Rob G.]

That's a good point. Income of a child received from a deceased estate or testamentary trust is taxed at adult rates, which means up to $16,000 pa tax free per kid. (who says kids cost money!).

Rob, do you have a view on whether money gifted after death to a testamentary trust could qualify to be taxed at adult rates? eg you kick off a testamentary trust with old uncle Jack. He has $100 and leaves it to a trustee to be held for a class of beneficiaries. The trustee then receives a gift of $1,000,000 from Jack's nephew (or maybe even a loan?) who then invests that money and, as trustee distributes $16,000 pa to his 10 kids who pay no tax = $160,000 pa potentially tax free. Would this work, or would only the initial $100 of the trust and the income generate from this be taxed at adult rates?

Hi Terry,

Div 6AA is concerned with unearned income of unmarried children, i.e. income splitting using child tax-free thresholds.

If the child has been left money from a deceased estate within the last 3 years, it could be put into a trust on their behalf that will generate excepted trust income, but is not a flexible as a testamentary trust.

Even outside a trust, investement of testamentary gifts, lottery wins or personal compensation payments for the child as well as their employment income can generate excepted income, but you must be able to trace the capital.

Trust property has to be held absolutely for that child, i.e. no streaming to other benefiiciaries. If it is being accumulated, then it must pass to the child's estate if they predecease the vesting date.

NOTE: It is believed by many commentators that income from capital fed into a trust by somebody else will not generate excepted income unfortunately.

**This is only a very quick comment without time for me to consider it more closely.**

Cheers,

Rob

 

[Terryw]

Thanks Rob, thats what I had heard too, but never looked into it either. so many things, not enough time.