How can I buy shares for kids?
It’s a question we get a lot at Money mag – how can I buy shares for my children or grandchildren?
You might think it’s a good idea to buy and register the shares in the child’s name but many brokers don’t allow this.
Australia’s biggest broker, CommSec, for example, doesn’t let you trade on behalf of a minor.
Its website states: “You can however open an account in the name of an adult who will act as a trustee until the minor turns 18. Once the minor has turned 18, the shares can be transferred into an account in their name.”
As there will be no change in beneficial ownership, because the shares were always intended for the child, you shouldn’t have to pay capital gains tax when that happens.
An issue that does arise, though, is who declares, and therefore pays tax on, the dividends.
If all the dividends and shares are held for the child – even if you made all the investment decisions and provided the money to buy the shares – then the child is the owner of the shares and declares the dividend income and all capital gains and losses from the sale of those shares, says the ATO.
As long as the child doesn’t earn more than $416 in “unearned” income they won’t have to pay any tax or even have to lodge a tax return.
On a share yielding a 5% fully franked dividend, for example, they would have to have about $5824 worth of shares before tax is payable.
If they earn more than that, the tax rate can be as high as 68%. The shares would be worth $10,400 if they were to break even on the tax due, taking into account the tax already paid on the dividends by the companies.
If the total franking credits are more than the tax liability for the year, you may be entitled to a refund of excess franking credits from franked dividends.
In that case a child who owns shares may need to lodge an income tax return to claim a refund of any excess franking credits, says the ATO.
The higher tax rate might not worry you if you have a modest share portfolio for your child, but if you intend to build a larger one, depending on your tax bracket, you might consider putting the shares in your name.
If you’re a couple it should go in the lower income earner’s name.
That way you can limit the tax payable on the dividends.
But in that case you are considered the beneficial owner and if you transfer the shares to your child when they turn 18, you will be hit with CGT. Before you buy the shares, you may benefit from getting advice from an accountant to work out the best approach.
Setting up a trust
Another option is to set up a discretionary family trust, which purchases the shares.
This is really only beneficial if your personal finances are complex.
Trusts can be expensive to set up and run and there’s no point spending the money just so you can buy your kids a few shares.