A gift for the grandkids at Christmas
Posted: December 03, 2008
A true story: When Fiona was 19 she fulfilled a dream to work in animal conservation in Africa for a year. She could afford it because her grandparents had started a savings plan for her when she was five. Fiona says she always had enough toys and other gifts at Christmas but this gift meant more than any of them.
Saving for children can provide funds for education, travel and other activities. For many years, saving for children tax effectively was difficult because unearned income was taxed at up to 66% to deter parents from splitting income with their children. Changing tax rules and new investments have now provided a wider range of options.
You can set up an investment in the child's name. The child could receive income of $2,667 in a year and not pay tax because the 2008 Budget raised the Low Income Earners Tax Offset to $1,200. A child with $48,500 in a savings account earning 5.5% over the year would pay no tax. Any income over this amount would be taxed at 45%.
To retain control of the savings once the child has reached age 18, you could use an insurance bond where income is reinvested and the life office pays tax at 30%. The proceeds of the bond are tax free after 10 years and the child can be named as the beneficiary of the bond. These bonds can be attractive for taxpayers on a marginal tax rate over 30%.
Alternatively you could invest in the name of an adult on a low marginal tax rate. You could earn over $90,000 in fully franked dividends and pay no tax because tax would have already been paid on the dividends at up to 30%.
An ‘implied trust' is an investment held in an adult's name in trust for the child. The child enjoys the tax-free threshold of $6,000 and you keep control. The investment must be used for the benefit of the child or the Tax Office can attribute the income to the account holder and tax them personally.
You could invest in your superannuation account as long as you are eligible to make contributions. Investment earnings will be taxed at 15% and withdrawals will be tax free once you are retired and aged over 60.
There is no one solution to suit every situation. Talk to your Avenue adviser about an appropriate solution that will make a difference to your grandchild in years to come.
