Clients often ask us what the most effective way is to invest for their children’s future. With the cost of housing and education becoming increasingly unaffordable, many parents want to give their children a financial head start. But what often gets overlooked is that the structure you use to invest is just as important as the investment itself. The right structure can help you minimise tax, maintain control, and ensure the money is used as intended. This article explores the most common structures used to invest for children and the pros and cons of each.
Investing in your child’s name
One of the first decisions to make is whether to invest in your child’s name or your own. At first glance, it might seem logical to invest directly in your child’s name, but this approach has significant tax implications. Minors are taxed at punitive rates on unearned income above $416 per year, a rule designed to prevent income splitting. While it’s a simple structure, it rarely makes sense from a tax perspective and limits your control, as the funds legally belong to the child.
Investing in your own name
A more flexible option is to invest in your own name and earmark the funds for your child’s future. This gives you complete control over how and when the money is used and allows you to manage the tax impact depending on your income. If one parent is on a lower marginal tax rate, this can be a relatively tax-efficient way to invest. The downside is that any capital gains you make may be taxed if you transfer the investment to your child down the track.
Investing as a trustee for your child
Some parents choose to invest as a trustee for their child, which means holding the investment in their own name but on trust for the child. This approach can be effective in avoiding high tax rates on the child’s income, as the trustee—usually a parent—pays tax at their own marginal rate instead. There’s also no capital gains tax triggered when the child takes legal ownership at 18. However, this structure does require discipline in record-keeping and you’ll lose control once your child becomes an adult.
Family trusts
Families who already have a discretionary (or family) trust may consider using it to invest for children. A family trust gives the trustee flexibility to distribute income to various family members, which can be beneficial for tax planning. However, it’s worth noting that minors still face the same high tax rates on unearned income, and the setup and ongoing costs of a trust may outweigh the benefits unless it’s already being used for other purposes. Control of the trust rests with the trustee, so the child doesn’t gain automatic access to the funds unless the trustee decides.
Insurance bonds
Insurance bonds are another option that appeals to families looking for a tax-paid, long-term investment structure. Offered by insurance companies, investment bonds are taxed at a flat rate of 30% within the bond and don’t require you to declare the income in your personal tax return, provided the funds stay invested for at least 10 years. If held for that period, withdrawals are generally tax-free. You can also nominate your child as the beneficiary or owner once they reach a certain age. While insurance bonds are simple and hands-off, they often come with higher fees than other investment options and limit how much you can contribute each year.
Superannuation
While not a direct investment for children, some parents use their own superannuation as part of a broader strategy to benefit their children. Super is a tax-effective environment, with earnings taxed at just 15% and withdrawals often tax-free in retirement. By building up their own super, parents can improve their long-term financial security and may be in a better position to support their children with gifts or assistance later in life. The main drawback, of course, is that super is inaccessible until you reach preservation age and meet a condition of release, so it’s not a short- or even medium-term solution.
Which structure is best for you?
Each structure comes with its own considerations in terms of tax, flexibility, control, and cost. There’s no single best option for everyone—it depends on your income, the amount you want to invest, how long you want to invest for, and whether you’re comfortable giving your child full access to the money when they turn 18. For some families, a mix of approaches works best—for example, using their own name for flexibility in the short term, while building investments inside a family trust or insurance bond for longer-term goals.
Get expert advice tailored to your family’s needs
Each family’s circumstances are unique, and it’s essential to seek personalised advice when investing for your child’s future. A financial adviser can help you navigate the different structures, model the tax implications, and ensure your investment strategy aligns with your family goals. Reach out to our team at Financial Spectrum if you’d like to explore the most effective way to invest for your children.
Frequently asked questions
What is the best way to invest money for a child in Australia?
The best way to invest for a child depends on your goals, time frame, tax position, and how much control you want over the funds. Common options include investing in your own name, using a family trust, setting up an insurance bond, or investing as a trustee for the child. Each structure has different tax and control implications.
Can I invest in my child’s name to save tax?
Generally, no. In Australia, children under 18 are taxed at high rates on unearned income over $416 per year to discourage income splitting. This makes investing in a child’s name tax-inefficient in most cases, especially for larger investments or income-producing assets.
What are the benefits of using a family trust to invest for children?
A family trust offers flexibility in distributing income to multiple beneficiaries, which can be useful for tax planning. However, minors are still subject to high tax rates on unearned income, and the cost of establishing and maintaining the trust should be weighed against the benefits.
Are insurance bonds a good investment option for children?
Insurance bonds can be a tax-effective, long-term investment for children. Earnings within the bond are taxed at 30% and withdrawals are generally tax-free after 10 years. They offer simplicity and control but may come with higher fees and contribution limits compared to other investment vehicles.
Rebecca is passionate about promoting the positive impact of quality financial advice on personal wellbeing. Read her full bio here.
