We just aim to help our grandsons


My wife Helen and I put $50 a month in each of our grandsons’ high-interest savings accounts. I am trustee. I also opened two CommSec accounts with me as trustee. Whenever their savings accounts get to $520 I buy shares for them as part of a long-term strategy towards a deposit on a house.

However, I am concerned about tax implications as one of the grandsons is nearing $416 a year of unearned income and, with the current tax laws, will be liable to pay tax at 66¢ in the dollar for any dollars over $416. I think this would be a great deterrent to any grandparents.

We are not rich people trying to hide money and avoid paying tax – we are just ordinary working grandparents trying to help our grandchildren (aged 4 and 2) with some long-term savings for them. What other options are there for grandparents who want to save money for their grandkids? I would prefer not to have the investment in my name, but would be trustee.



Kids’ tax rates are a necessary evil and there are legal ways to work round them

Peter, the “unearned income” rule and very high levels of tax are a real pain for grandparents trying to give their grandkids a good start. The rules are designed to protect our tax base, but they also catch and penalise many people like you. Broadly, from a community viewpoint, I do see the logic in high tax rates on unearned income for minors. Unearned income is family trust distributions, dividend income, royalties and bank interest received by a child, that is, someone under 18. If a youngster has a job, even just delivering a few newspapers, then that is earned income and is taxed on normal adult tax scales.

The problem with taxing kids at adult tax rates on unearned income is that it would be a huge win for wealthier families with investments or a family trust. I have three kids, now adults, but my tax bill for the last two decades would have been dramatically reduced if I could have invested our money in their names, or made family trust distributions to them. Each child, using today’s tax tables, could have received $18,200 income tax free and then up to $37,000 at 19%.

So, quite sensibly, the government brought in an unearned income rule. I guess it was either that or shut down a bunch of hospitals. But then along came the low-income tax offset. Kids could claim this and so, rather than earning $416 of unearned income tax free, they could earn $3333.

Many might argue this is a more sensible number than $416 but the cost due to parents splitting income with their kids was around $250 million a year. Pretty obviously, poorer families would get no benefit whatsoever. Here we move into a difficult debate about who deserves what from our tax system. I’ll stay away from it but, with an ageing population, I do know that if we want to continue the health, schooling, roads, policing etc we have now, we need more tax, not less.

So in July 2011 the government denied access to the low-income tax offset to kids, taking us right back to the issue you face. Your grandkids will pay no tax on unearned income from $0 to $416, 66% on $416 to $1307 and then 45% above that.

I would say there is Buckley’s chance of the $416 being increased. So how do we help our young ones without being hit with 66% tax?

Sure, there are school scholarship plans or insurance bonds where there is either a tax exemption or tax is paid at the company rate of 30% inside the product. But, like you, my preference has been to invest directly in shares or via a managed fund. I particularly like direct investment because of the sense of ownership. My kids had far greater interest in a few shares in familiar companies such as Woolies, banks, Coca-Cola and so on.

Our solution was generally to buy the shares in my wife’s name, as she was the lower-income earner, as trustee for the individual child once the kids got close to earning $416 in investments in their name. This worked very well, due to the franked dividends; the reality is very little tax was paid anyway. As the shares were being held in trust, when we transferred them to the kids as they hit 18 there was no change in beneficial ownership, so no capital gains tax.

Today a first-home saver account, with a 15% tax and government top-ups, is worth a look, and super for the really long term. I support the unearned tax rule but I do think we parents and grandparents can easily work around the 66% tax issues perfectly legally by investing as “trustee for”.


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