Shares & Funds Children's Shares Loophole

Discussion in 'Accounting & Tax' started by gty12, 20th Feb, 2020.

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  1. gty12

    gty12 Well-Known Member

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    Hey all,
    Was looking into this investing on behalf of a child thing. My understanding is that children under 18 pay very high tax rates hence you might as well have shares in a low-income adult's name instead. I understand however, that one can put a child in as the 'beneficiary' when buying shares and transfer ownership at 18 thus no CGT for you. But my query is:
    Surely if you are transferring shares to them when they are 18, if they then sell them, or even wait a year until 19 and sell them, they are then an adult-so surely any CGT they pay goes back down to adult levels?

    In any case I take it they are still entitled to 50% discount on shares held over 12 months like an adult?

    would be looking at solely capital growth shares, no dividends.

    Thank you very much,
    Gty
     
  2. ChrisP73

    ChrisP73 Well-Known Member

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    If this is the case then there's no income tax to pay so it wouldn't matter shares we're in the child's name (from an income tax perspective).
     
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  3. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    Why not an insurance bond. Tax free after 10 years and you can add to the investment. No CGT concerns :) And it can be structured so they cant access the value until a age you define etc
     
  4. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    Wrong. Growth = cap gains = tax. Cap gains are just another form of income and yes for kids they get a discount BUT then face 60% tax.
     
  5. PurpleTurtle

    PurpleTurtle Well-Known Member

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    I think the implication was the shares are not sold until the child is an adult so there's no tax implications while the child is still a child.
     
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  6. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    The assumption that shares will be held that long without changes may be false. Look back 10 years and Telstra was a buy as well as Pasminco and other resources
     
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  7. PurpleTurtle

    PurpleTurtle Well-Known Member

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    Yep. Fair call.
     
  8. Redwing

    Redwing Well-Known Member

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    A low cost index fund or LIC then, AFIC also do DSSP

    AFIC | Shareholders
     
  9. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Plus Member

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    If the child is the beneficial owner they will be taxed on the income but not cgt when shares transferred to their name. They could demand title on their 18th birthday. 50 percent cgt discount would apply based on the time the trustee bought the shares.
     
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  10. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Plus Member

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    BTW this is no loophole but standard trust law
     
  11. Ross Forrester

    Ross Forrester Well-Known Member

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    If you are operating a standard discretionary trust just use the kids assets as a side investment in the trust.

    Allocate dividends to the parents while the kids are under 18 to avoid penalty tax rates. When the kids turn 18 plus and you sell allocate the capital gain to them.

    It also helps for kids to not have large investment portfolios if they go for Austudy benefits.
     
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  12. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    Its important to consider if the kids (each) need to have an entitlement or a potential possible expectation of getting "their" money. When co-mingled it could become lost rather than say a sub-trust. The siblings could also be severally affected rather than have a personal right. If its all held in a trust there may be less protection and recourse if mismanaged or lost.

    I had a client with a grandparents trust that followed this Disc Trust example. It became a nightmare 15+ years after the grandparents had died and the original sums became available at different times eg when each became 25. And the trust contained a limiting clause which needed court approval to change since the trust contemplated unborn siblings but then was silent on this issue which later occurred and the unborn siblings appeared to hamper any distribution until they had all attained age. (The court ordered the trust wound up as all (adult) beneficiaries and trustees (their parents) consented as relief - Very costly but the capital had noticeably risen)

    Its really a case of considering what the end game should be and each pro and con. And costs
     
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  13. Intrigued_again

    Intrigued_again Well-Known Member

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    I don’t think anyone one would balk at 13.14% total return from Telstra for the past 10 years.

    Always pays to check
     
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  14. gty12

    gty12 Well-Known Member

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    Thank you all.
    We ended up using the mother's name to purchase as she did not think she would work above a taxable level until the child was over 18.
    We used the CommsecPocket, but note to anyone using this:
    1. All the options unfortunately have dividends
    2. The price per ETF unit is actually quite high so it is difficult to do roundnumbers
     
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  15. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    1. Options and ETFs dont pay dividends. Distributions are paid and taxed very differently to shares
    2. Some unlisted investmnets allow fractionsal units where listed ETFs and managed funds cannot
     
  16. Redwing

    Redwing Well-Known Member

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  17. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    And ETFs all have different tax treatments and elements. Some dont even pay income. In which case any borrowing to acquire them may be non-deductible
     
  18. Scott No Mates

    Scott No Mates Well-Known Member

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    Found a link on the CBA website a few weeks ago.