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Set your kids up financially … for life – Part 2
Gifting shares to your children or grandchildren should be something to consider if you want to help them grow up financially savvy. While it is unlikely to produce the same initial reaction as unwrapping that xBox game or Robotic Puppy, it should hopefully create a lifelong interest in investment, as well as set them up financially for life.
In the second part of this three part series, we will look at how to do it.
Buying shares for minors
There is no law that specifically says that shares can not be owned by minors (the under 18s). However, some companies have a clause in their constitution prohibiting the registration of shares to minors, so general convention has led the ASX, through CHESS, adopting the no minors rule. Further, many brokers have automated account opening and identification systems, which just don’t allow an under 18 to operate.
To buy the shares, first open an account with a broker. Open this in your name, with the name of your child/grandchild in the account designation field. In law, you will be the legal owner, while the beneficial owner will be your child/grandchild. You don’t need to establish a formal trust to do this.
The account on CHESS will be set up, and the shares registered, as follows:
Frederick John Smith: Parent/grandparent
(Mary Jane Smith A/C): Child/grandchild
When your child turns 18, you should be able to complete an ‘off-market’ transfer that changes the ownership legally to your adult child. As there will be no change of beneficial ownership, there shouldn’t be any capital gains tax to pay at that point.
Although a child can get a Tax File Number (TFN) at any age – yes, there is no minimum and the ATO also runs a program with secondary schools that makes getting a TFN easy – the shares are legally going to be registered in your name. This being the case, the ATO says you should quote your TFN (unless there is a formal trust, where you would quote the TFN of the trust). Even if you quote your TFN, you won’t be liable to pay tax if the shares are beneficially owned by the child. Payment of the dividends to the child’s bank account would be sufficient demonstration that they are the beneficial owner.
Potentially, the child may be liable for some tax – however, if the shares pay franked dividends, it is not likely to be too much.
For minors, “unearned” income, such as interest or dividends, is taxed at special rates: