Investing in your child’s future early is a wise way to help them later in life, but it is not always straightforward and you don’t want to be burdened with unexpected tax obligations. Here are three clear steps to help you decide how to best invest on behalf of your child:
Step One: Should you quote a Tax File Number
When you buy shares, you have a choice whether you quote a tax file number (TFN).
If you quote a TFN, you pay taxes on the dividends when you lodge the tax return. If the shareholder is the:
- child, quote the child’s TFN
- parent, as trustee for the child and
- no formal trust exists, quote the parent’s TFN
- there is a formal trust, quote the trust’s TFN.
A child can apply for a tax file number (TFN) – there is no minimum age. Children are not exempt from quoting a TFN.
If you don’t quote a TFN, pay as you go (PAYG) tax will be withheld at 47% from the unfranked amount of your dividend income.
Step Two: How to declare dividends
Whoever rightfully owns and controls the shares declares the dividends and any net capital loss or gain from the sale of shares. You need to consider who:
- provides the money for the shares
- makes share decisions
- spends the dividend income.
If there are large amounts of money or a regular turnover, you might need to examine the ownership of the shares further, including finding more information to work out who should declare the dividends.
Step Three: Lodging a tax return
If your child owns shares and earns more than $416, you must lodge a tax return on their behalf.
If your child earns $416 or less, you may also want to:
- lodge a tax return on their behalf if too much PAYG tax was withheld, or
- claim a refund for franking credit by lodging a tax return or completing an Application for refund of franking credit.
If you have any further questions on investing on your child’s behalf please don’t hesitate to get in touch with our expert accountants.
For examples of tax implications for investing in shares on your children’s behalf click here.
This article was sourced from www.ato.gov.au