I want to give $65k to my teenage kids. How do I stop them spending it?
I recently inherited a lump sum and would love to set aside $65,000 for each of my three children (one adult and two aged 16 and 12) to invest and grow into a future home deposit.
The eldest is smart enough to handle stocks now, but the younger two – let’s say, I’d prefer to delay access until their brains (and spending habits!) have matured a bit. What is the most tax efficient way to structure this for minors?
The simple way to go would be to hold the investments in your name. Then you have full control and give them the money at the appropriate time. The disadvantage of this is that you will pay tax on assessable income while the investments are held, and you will be liable for capital gains tax when the investments are redeemed.
Most parents are willing to accept this, especially if they are not in the top tax bracket and the amounts involved are not very large.
An alternative would be to use an insurance bond where you can set the qualifying age; At this point the investment will automatically be transferred to your children. This won’t have any tax consequences for you, but the bond pays a 30 percent tax on gains during the holding period, so no free lunch there either.
Small tax rates (up to 66%) do not apply where money is left directly to children by will. In this case, you are the beneficiary in the will and they are receiving a gift from you, so the exemption does not apply.
Capital gains made in a managed fund are declared on my tax return each year, so I assume capital gains tax is paid. So why is capital gains tax re-applied when withdrawals are made from the managed fund?
Great question. Mutual funds such as ETFs and traditionally actively managed funds make portfolio changes throughout the year. That’s what you pay them for. These changes trigger capital gains assessments and, if they reach a net positive number, will be reflected in your annual tax summary return.
When you exit the investment, you will make a profit if you sell at a higher price than the unit price at which you purchased it, meaning you may owe capital gains tax on that gain.
Should I switch some of my retirement funds to a higher growth class, or take some of my savings and place them in a high growth ETF? I’m 58, have my own home, $900,000 in super, $500,000 in Australian shares and around $150,000 in savings. I think I have 10 years of work left and I’m currently putting the maximum into retirement income. My retirement is currently in a balanced option.
None of us have a crystal ball, but historically a high growth investment option would be expected to deliver negative returns at a rate of 1 in 4 years. So if you put some money in there, given a 10-year time horizon, you should be able to move on for maybe another 2 or 3 years when the value of your portfolio declines.
If this is tolerable, on the other hand, you will likely have 7 or 8 years of positive returns, and because you are prepared to accept this higher degree of volatility, the positive years will likely be a higher rate of return than seen with the balanced option. The answer to your question depends on your ability to stay calm when the markets are falling.
Paul Benson is a Certified Financial Planner. Guidance Financial Services. He is hosting Financial Autonomy podcast. Questions: paul@financialautonomy.com.au
- The advice given in this article is general in nature and is not intended to influence readers’ decisions about investments or financial products. They should always seek their own professional advice, taking into account their personal circumstances, before making any financial decisions.
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Paul Benson is a Certified Financial Planner and host of the Financial Autonomy podcast.
