Set your kids up financially … for life – Part 2

Co-founder of the Switzer Report
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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:

Income includes both the dividends in cash and the imputation (franking) credits. So tax will be payable once the income exceeds $416 – which on a share yielding (say) 5.0% fully franked, is equivalent to a portfolio of $5,824 in size. And of course, the imputation credits will also act as a tax offset.

Many minors won’t get to the income threshold and will be eligible for a refund in cash of the imputation credits. If this is the case, don’t forget to arrange the completion of an ‘Application for refund of franking credits for individuals’ from the ATO.

What shares to buy

The starting point is to balance the size of the gift vs transaction costs (brokerage) vs finding some shares that are going to be good long-term performers. If an objective is also to help your child/grandchild develop an interest in investing, name familiarity (that is, finding companies that your child can identify with) is also going to be important.

The minimum order size that you can place for an initial investment is $500. However, if you are paying brokerage of $19.95 or $29.95 – this represents transaction costs of 4.0% or 6.0% respectively – a pretty big chunk. So, I would suggest that you try to get the parcel size up to at least $1,000.

You also want to select stocks that come from a diverse set of industries/sectors, and names that should be around in many years’ time. It is hard enough thinking about the market in the short term – so thinking about the long term, where there are going to be so many up and downs, probably leads to the conclusion that you stick to the major blue chip companies.

If I was feeling particularly generous this Christmas and planning to gift $3,000, I would select:

$1,000 of my child’s bank (Commonwealth Bank)
$1,000 of the company where we buy our groceries (Woolworths)
$1,000 of BHP (mining is a big part of Australia)

I don’t claim that there is any “investment science” in the selection of this portfolio. However, there is some elementary diversification: they are companies my child should be able to identify with; I am confident that these companies are likely to be around in 10 years; and I have an expectation that they should continue to be able to pay franked dividends.

CommSec’s Share Packs

Rather than do the hard work yourself, an alternative is to purchase something like a Share Pack from CommSec (some of you may remember these as the old ‘Aussie Shares’). CommSec offers four categories of share packs, which are available in amounts from $4,000 (minimum) to $25,000. A fixed brokerage rate of $66 is charged for an online order.

The four categories are Capital Growth, Income, Market Leaders and Tax Effective Income. Each pack comprises four to six companies, selected by the CommSec Research team. On Friday, the $5,000 ‘Capital Growth’ pack looked like this:

These pre-mixed alternatives are easy to buy, cost effective and arguably, have a stronger element of diversification. While I can’t readily see how Westfield Retail Trust qualifies under the “capital growth” label, let’s assume that there is some science in their construction. The downside with these packs is that the name recognition may not be as high.

Whether you use these pre-made packs from CommSec or do the hard work yourself and select one or more shares, in the long term, I am sure that your child or grandchild will eventually appreciate any gift of shares – no matter how large or small.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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