Liam asks: I want to invest some money for my children to use when they are older. I’ve looked into scholarship funds but I can’t guarantee the money will be used to pay for their education. What other options could be suitable?
Scholarship funds can be a tax-effective option if the money is used to pay for eligible education expenses, but are not as attractive if the money is used for other purposes. Given you want the flexibility to decide how the money is spent, it would be sensible to consider other options.
Some investments, such as bank accounts, can be held in a child’s name. Others, such as shares and managed funds, can be purchased by an adult acting ‘as trustee for’ a child.
With both these ownership options, the earnings will usually be taxed at children’s rates if an adult has provided the funds and the investment is treated like it’s the child’s money.
If that’s the case, the child could earn up to $416 pa without any tax being payable. But high tax rates apply if income exceeds this limit. Each dollar in income earned between $417 and $1,307 is taxed at 66% and, if the income is $1,308 or higher, every dollar of income is taxed at 45%. These rules exist to discourage people from holding larger amounts in the name of a child.
Another option is for you or another adult to invest in your own name. This would be more tax-effective if the investment was held in a lower income earner’s name, as adults can earn up to $20,542 pa from investments or other sources before any tax would be payable.
Investing in an adult’s name could also be appealing if having full control over the money is a top priority. One of the shortcomings of investing in the name of a child, or as trustee for a child, is that the child becomes the legal owner of the money when they turn 18 and, at that point, can decide when and how they spend it.
Another option that could suit if you are a higher income earner is an insurance bond. With these investments, earnings are taxed in the fund at 30% and no tax is payable on withdrawals if the investment is held for 10 years or more and certain other conditions are met.
The best way to invest for your children will depend on how much money is available, what the money is to be used for, the amount of income earned and the level of control desired. We suggest you speak to a financial adviser so you can weigh up these issues and make the right decision.