Parents and grandparents usually put money aside to help pay for education or other expenses that come up through the child’s early years, or to provide a kick-start to pay for university, travel or a deposit on a home.
There is a selection of financial products specifically designed for saving for a child’s education. The best examples are the education savings plans offered by some financial institutions.
These offer tax and other potential advantages, but come with terms and conditions, so it’s wise to seek financial advice on whether such products would be appropriate for your situation, and the expected needs of the child.
Other approaches include parents saving for their children in the child’s name, or in their own name.
If funds are saved in a bank account in one, or both, parent’s name, and simply earmarked for the child’s use, the interest earned will generally be declared in the appropriate parent’s tax return. This approach can work well if funds are invested in the name of a low income-earning parent.
If an account is established in the child’s name, the tax treatment of interest earned is dependent on who provided and who uses the funds in the account, according to the ATO. If a person other than the child provides and uses the funds, then that person must declare the interest earned in their own tax return.
When the funds are sourced from gifts such as birthday or Christmas cash presents to the child, pocket-money or part-time earnings, and not used by any person other than the child, then the interest earned is the child’s income. It may seem appealing to hold the money in the child’s name, but special tax rules that apply to child savings must be considered.
Children can only earn up to $416 on returns from savings and investments before they have to pay tax, according to the ATO.
Except for some special cases, children with an income between $416 and $1347 have to pay 68 percent tax on amounts earned above $416. Those with an income higher than $1347 a year must pay 47 percent tax on the total amount.
Parents who are planning to save or invest in the child’s name can get a tax file number (TFN) for the child. There is no minimum age at which a child can have a TFN.
In some circumstances, financial institutions must withhold 49 percent in pay-as-you-go tax on interest earned on children’s bank balances where they don’t have the child’s TFN. The child would have to lodge a tax return to get the money back, and to do that they would have to have a TFN.
Parents should also take care with share investments for children. Unless the shares and dividends are held for the benefit of the child, generally the person who makes the decisions regarding the shares and uses the dividends will be liable for the taxation of dividends and capital gains or losses.
Children who own shares and earn more than $416 must lodge a tax return.
Income a child receives from a family trust is taxed at the high marginal rates referred to above, ‘to discourage adults from splitting their income and diverting it to their children’, according to the ATO.
However, income a child receives from trusts established by will (testamentary trusts) are taxed at ordinary marginal rates and should be considered by parents and grandparents as part of their estate planning.
Parents could also consider saving for the kids in the context of the broader family finances.
For some families, paying extra off the mortgage or holding funds in an offset account earmarked for the child’s use at a later date might be an effective option. That course of action could help pay off the home loan more quickly, releasing the family from debt and freeing up cash flow in the future.
Grandparents on a government aged pension should take care with gifting money. Gift amounts in excess of $10,000 in a financial year (to the maximum of $30,000 over five years) are treated for Centrelink purposes as if they are still assets of the individual, which may have implications for eligibility for the age pension and other government benefits.
Disclaimer
This information is provided as a guide only and is not intended to constitute advice whether legal or professional. You should obtain appropriate advice concerning your particular circumstances.
