Investing for my children and capital gains

[magillacuttie]

I have been investing in Property for the past 20 years but I am now about to start investing in shares. I want to set up portfolios for each of my kids. I want to know whether I have to pay capital gains tax on any shares that sell for a profit that were held in my children's name.

 

[Sharkman]

depends how old they are. you might want to read this first. the tax rates for minors are punishing on income that they didn't "actively earn".

Page not found | Australian Taxation Office

www.ato.gov.au

 

[Warr87]

someone has to pay tax. the tax rates would be 'punishing' as sharkman mentioned to stop people taking advantage of their tax free threshold from their kids. obviously a good way for rich people with a couple of kids to avoid paying taxes. if its such an issue, and you think it will be a large amount, then you should look at an actual business structure or trust structure. dicretionary trust + bucket company. but realistically, you should consult a professional. the whole idea of a discretionary trust is that it is for the benefit of the benefactors (family members).

 

[Belli]

In addition to the comments by others who have posted, this may be useful as well

Children's share investments

Information about who is responsible for paying tax on dividends received from share investments made by or on behalf of children.

www.ato.gov.au

Remember, the ATO collects individual data from various sources (share registries, banks, companies and a whole lot more.) It does not delete that data. Can come back to bite some as a result.

 

[Value Collector]

I have been investing in Property for the past 20 years but I am now about to start investing in shares. I want to set up portfolios for each of my kids. I want to know whether I have to pay capital gains tax on any shares that sell for a profit that were held in my children's name.

as mentioned above tax rates can be punishing.

however, if you find a company that you really like that doesn’t pay dividends and you just hold it longterm without selling it, you won’t have to pay tax on anything.

Berkshire Hathaway which is an American company has been good for this, they don’t pay dividends.

 

[tinhat]

The greatest investment you can make for your kids it to take them snorkeling on the Great Barrier Reef, now!

 

[Sharkman]

there is a sneaky way of getting around the punishing tax rates on minors. i didn't mention it earlier, as i do think it goes against the spirit of the system, but in the end i decided to put it out there anyway, so others are informed and can make of it what they will. note that i have only read about this tactic during the course of doing research for setting up my own company trust years ago, i don't do this myself and i don't personally know anyone who does, so definitely get professional advice if you're even thinking about going down this route.

what you do is set up a family trust, and a company as a beneficiary of that trust. the company then "employs" your kids to do stuff around the house like mow the lawn, clean the pool, wash the dishes etc. they don't actually HAVE to do those things (though of course you can make them do the chores if you want!), all you have to do is produce the usual documents that a normal employee would require - employment contract, payslips etc. it MUST be done at a realistic rate, you cannot pay them $100 an hour to wash dishes for eg.

this apparently (again - i have not tried this myself - talk to an accountant first) qualifies your kids as "actively earning" the income, so they get the full tax free threshold, instead of the thresholds for minors. you pay their "salary" out of your company beneficiary, which becomes an expense for the company, and therefore it offsets the income (be it capital gains or dividends) you distribute to the company from the trust. the shares would be held under the trust.

from what i read, if they are under 18, simply setting up a discretionary/family trust with your kids as beneficiaries and distributing the capital gains/dividends to them will not work. they still haven't actively earned that income, and it will get taxed at the rates for minors. you must officially employ them in some way to get that actively earning status, even if they don't actually do the job you pay them for (which i guess applies to some people in real jobs too, maybe that's why it seemingly doesn't get questioned a lot).

whether the tax saved outweighs the cost of administering all of this is something you'd have to carefully assess for yourself.

 

[tinhat]

there is a sneaky way of getting around the punishing tax rates on minors. i didn't mention it earlier, as i do think it goes against the spirit of the system, but in the end i decided to put it out there anyway, so others are informed and can make of it what they will. note that i have only read about this tactic during the course of doing research for setting up my own company trust years ago, i don't do this myself and i don't personally know anyone who does, so definitely get professional advice if you're even thinking about going down this route.

what you do is set up a family trust, and a company as a beneficiary of that trust. the company then "employs" your kids to do stuff around the house like mow the lawn, clean the pool, wash the dishes etc. they don't actually HAVE to do those things (though of course you can make them do the chores if you want!), all you have to do is produce the usual documents that a normal employee would require - employment contract, payslips etc. it MUST be done at a realistic rate, you cannot pay them $100 an hour to wash dishes for eg.

this apparently (again - i have not tried this myself - talk to an accountant first) qualifies your kids as "actively earning" the income, so they get the full tax free threshold, instead of the thresholds for minors. you pay their "salary" out of your company beneficiary, which becomes an expense for the company, and therefore it offsets the income (be it capital gains or dividends) you distribute to the company from the trust. the shares would be held under the trust.

from what i read, if they are under 18, simply setting up a discretionary/family trust with your kids as beneficiaries and distributing the capital gains/dividends to them will not work. they still haven't actively earned that income, and it will get taxed at the rates for minors. you must officially employ them in some way to get that actively earning status, even if they don't actually do the job you pay them for (which i guess applies to some people in real jobs too, maybe that's why it seemingly doesn't get questioned a lot).

whether the tax saved outweighs the cost of administering all of this is something you'd have to carefully assess for yourself.

revolution now. death to the rich.

 

[Belli]

Sounds wonderful, doesn't it? Better not forget if the company employs people, there could be employer obligations involve (PAYG, Super, etc) and the use of the ATO small business portal to report these obligations. Then there are anti-avoidance provisions.

General anti-avoidance rules and PSI

In certain circumstance, the general anti-avoidance rules may apply if you're carrying on a personal services business.

www.ato.gov.au

 

[Sharkman]

absolutely, which is why a qualified professional should be involved in setting something like that up, as there'd be all sorts of things to take into consideration. like i said, i don't do this, i merely read about it in the past. but if anyone does, would be interested in hearing if it actually works, for curiosity's sake. i won't judge.

 

[dyna]

Instead of trying to create wealth for the kids,why not get them interested in making it for themselves? The earlier they start their self education,the more they'll accumulate,slowly, over a lifetime of learning and patience.That's how, just about all of us on this wonderful forum did it.

 

[tech/a]

And there its is

The sound advice which few will recognise.
Invest the money in worthwhile education
of that boring topic--finance.

That is presuming you can.

It should begin with personal finance and balancing
finance and lifestyle.
How businesses are run and the pros and cons of being involved in one.
Property
Share investment and trading.
The power of Leverage and its pit falls.
The power of Compounding.
How to use other peoples money.

Worth way more than you'll ever put away.
And if it's Millions that you can put away they will
need to know how to use and KEEP it.

Teaching one to fish----you know the rest.

 

[BlindSquirrel]

absolutely, which is why a qualified professional should be involved in setting something like that up, as there'd be all sorts of things to take into consideration. like i said, i don't do this, i merely read about it in the past. but if anyone does, would be interested in hearing if it actually works, for curiosity's sake. i won't judge.

Still spitballing, this would only work for a couple of years because you can't employ children under the age of... I wanna say 15?

After a bit of googling in WA law

(https://www.commerce.wa.gov.au/labour-relations/when-children-can-work-western-australia)

As you were!

 

[Belli]

OK, one possibility. WHF and MIR, which I hold have Dividend Share Substitution Plans. I thjnk AFI also has one.

Apply to ATO on behalf of child for aTFN for them. Buy shares for them as a bare trust, eg Dad <Child name A/C>. Select all shares to be under DSSP. No income or franking but additional shares instead of cash dividend. Thing is once they turn 18 they can demand the shares vest, sell them and blow the lot having a good time at some house of ill repute and you won't be able to a damn thing about it.

 

[sptrawler]

And there its is

The sound advice which few will recognise.
Invest the money in worthwhile education
of that boring topic--finance.

That is presuming you can.

It should begin with personal finance and balancing
finance and lifestyle.
How businesses are run and the pros and cons of being involved in one.
Property
Share investment and trading.
The power of Leverage and its pit falls.
The power of Compounding.
How to use other peoples money.

Worth way more than you'll ever put away.
And if it's Millions that you can put away they will
need to know how to use and KEEP it.

Teaching one to fish----you know the rest.

It all works great in theory, but the problem is the person has to be interested, I have four adult children and know hundreds of people, due to changing jobs and moving throughout my life.
Only a few are interested in saving or investing, most are interested in spending.lol

 

[Warr87]

It all works great in theory, but the problem is the person has to be interested, I have four adult children and know hundreds of people, due to changing jobs and moving throughout my life.
Only a few are interested in saving or investing, most are interested in spending.lol

i agree. not everyone is interested. teaching good money habits is good though, but not everyone will want to be an active investor lol.

 

[Value Collector]

It all works great in theory, but the problem is the person has to be interested, I have four adult children and know hundreds of people, due to changing jobs and moving throughout my life.
Only a few are interested in saving or investing, most are interested in spending.lol

It’s one of those twisted facts of life, the more you enjoy spending, the less you ultimately have to spend, however people that have the discipline to save and invest often end up with far more money available to spend.

life is like that test people do on kids, where they put a Lolly in front of the kid and sayif they avoid eating it for 5 mins they can have 3 lollies, most kids can’t wait the 5 mins.

credit cards and personal loans are the adult versions of the test.

 

[Belli]

i agree. not everyone is interested. teaching good money habits is good though, but not everyone will want to be an active investor lol.

Very true.

So many overlook the obvious which is your children are not you. One should never assume your aims and attitudes will automatically be transferred to them. Doesn't stop parents thinking that way of course. It may happen. Or it may not.

 

[tech/a]

It all works great in theory, but the problem is the person has to be interested, I have four adult children and know hundreds of people, due to changing jobs and moving throughout my life.
Only a few are interested in saving or investing, most are interested in spending.lol

Can of Worms

This can be said of anything that you need to strive for.
Academic, Social, Sport, Work, Family.

Perhaps rehabilitation of any sort in any field should be scratched as
some just won’t travel the path.

Your right not everyone will accept challenges.
But not everyone is capable of generating interest and enthusiasm
Passion is contagious. I’ll bet you can’t NOT laugh at Michael McIntyre.

Can of Worms.

 

[tech/a]

Been thinking about this while training

I’ve noticed that we all have vastly different things that interest us and some which we are passionate about
These are the ones we tend to put time and effort into

I think for those who are pointing the way try and find that passion in a person and encourage it
If it is
then find one and get really good at it

Do it once ( become really good ) and you and others will try something else.

personal example

Trading improved my business skills no end.
Running a 6 day Ultra tri after 18 mths training
35 years ago has stayed with me all my life
I don’t give up
But I can evaluate results for effort.

So how’s that Trust account Idea going !!
Apologies to the OP
I’d do help a lot of people often they don’t know
But not unless they are putting in an effort.