It's a lot easier to just set up a single (diversified) stock like like EX20 and buy it under your name, then do an off-market transfer when they're old enough.
Or if you prefer their parents to deal with the tax issues, you can let them set stuff up in the name of the parent with the lowest income
yep. OTOH it resets the accounting for the recipient so they don't need to worry about the 50 batches of shares you bought; according to their CGT, they received the entire lot at once, at whatever the market price was that day.
There are two ways of doing this. Essentially, when setting up a brokerage account for them with a brokerage which allows accounts on minors' names, you can:
1) use the minor's TFN. You will need to file a tax return each year on their behalf. Gains above ~$450 will be punitively taxed, gains below that will not be taxed (or the tax is low -- I don't recall).
2) use your or the other guardian's TFN, but declare the minor as the beneficiary. In this case you will declare the gains in your tax return as if they were yours, and they will be taxed as such. But there will be no punitive taxation for gains beyond the aforementioned limit.
You can find all the relevant details via the ATO.
Even though there's 'more expense', my opinion is that the second option is less complicated. Less tax returns, better tax treatment for larger accounts. The first option seems superior for accounts never expected to go beyond about 20k, as long as the extra complexity of a minor's tax return isn't a bother.
Selfwealth supports the second option, I believe. I haven't checked if they support the first.
If I've made an error, someone please correct me.
I've seen a private binding ruling from the ATO saying that if you declare the income in the parents TFN, you can not transfer the original cost basis to the child.
Either the child is the *real* beneficiary and pays income tax under their own HIN (and can then transfer the shares along with the original cost basis), or they are not the real beneficiary and you can not transfer the shares along with the original cost basis and instead will need to realise gains.
I don't really see an issue with realising the gains on transfer: it makes sense. It is the same outcome as selling the asset then gifting the money.
If course, if it works out less tax overall with option 1, you do that.
If your child uses a minor trust account with their own TFN, then when you gift it to them, they inherit the original cost basis.
If they also have no income (e.g. if at university at 18 and not working), they can sell down up to a capital gain of double the tax-free threshold (due to the CGT discount) and pay zero tax. They can do that over multiple years and effectively pay zero tax on all the capital gains for the previous 18 years (depending on how much of a capital gain they have).
Zero capital gains ever paid vs having capital gains paid by the parent at the parent's marginal rate when they gift it. So yes, it certainly can work out to less tax (provided you go with high growth low-yield assets).
Maybe depends on if he is only investing that much, and of course some other etf will distribute more, didn't vdhg distribution at 10% last year.
It was just a warning to the op that tax hits at quite a low threshold
I posted this in another thread before:
> If you have kids and wanna open an index fund on behalf of them (giving them a head start and all), choose a minor trust account and purchase funds that allow DSSP e.g. AFI. Any gains or dividends share repurchase from a DSSP will not be taxed at all.
>
> A lot of people on this sub sometimes hastily chooses to open a minor trust share account for their kids but then proceed to buy all sorts of index funds, like vanguard, without realising what are the tax implications or even considering how much it can erode future gains. For example, any profits above $416 per year for a minor will be added to the parent's income tax thus can incur up to 66% tax if you are on the highest bracket!
>
> DSSP or nothing. :)
Link to comment thread: https://www.reddit.com/r/AusFinance/comments/o8mf9h/what_are_some_relatively_unknown_tax_tips_you_can/h36gq8l/?context=3
>DSSP or nothing. :)
You can also choose international indexes which tend to have very low distributions. Using AFI DSSP with VGS at say 40/60 will result in extremely low distributions while allowing you to remain globally diversified. You cold even swap out some VGS for VISM/IVE/IJH/IJR for even lower income.
It's a lot easier to just set up a single (diversified) stock like like EX20 and buy it under your name, then do an off-market transfer when they're old enough. Or if you prefer their parents to deal with the tax issues, you can let them set stuff up in the name of the parent with the lowest income
Yeah as someone who was gifted shares (and a tfn) at birth it’s a bloody nightmare. Package it for them to receive all at once at 18.
would that off market transfer be subject to capital gains?
yep. OTOH it resets the accounting for the recipient so they don't need to worry about the 50 batches of shares you bought; according to their CGT, they received the entire lot at once, at whatever the market price was that day.
There are two ways of doing this. Essentially, when setting up a brokerage account for them with a brokerage which allows accounts on minors' names, you can: 1) use the minor's TFN. You will need to file a tax return each year on their behalf. Gains above ~$450 will be punitively taxed, gains below that will not be taxed (or the tax is low -- I don't recall). 2) use your or the other guardian's TFN, but declare the minor as the beneficiary. In this case you will declare the gains in your tax return as if they were yours, and they will be taxed as such. But there will be no punitive taxation for gains beyond the aforementioned limit. You can find all the relevant details via the ATO. Even though there's 'more expense', my opinion is that the second option is less complicated. Less tax returns, better tax treatment for larger accounts. The first option seems superior for accounts never expected to go beyond about 20k, as long as the extra complexity of a minor's tax return isn't a bother. Selfwealth supports the second option, I believe. I haven't checked if they support the first. If I've made an error, someone please correct me.
I've seen a private binding ruling from the ATO saying that if you declare the income in the parents TFN, you can not transfer the original cost basis to the child. Either the child is the *real* beneficiary and pays income tax under their own HIN (and can then transfer the shares along with the original cost basis), or they are not the real beneficiary and you can not transfer the shares along with the original cost basis and instead will need to realise gains.
I don't really see an issue with realising the gains on transfer: it makes sense. It is the same outcome as selling the asset then gifting the money. If course, if it works out less tax overall with option 1, you do that.
If your child uses a minor trust account with their own TFN, then when you gift it to them, they inherit the original cost basis. If they also have no income (e.g. if at university at 18 and not working), they can sell down up to a capital gain of double the tax-free threshold (due to the CGT discount) and pay zero tax. They can do that over multiple years and effectively pay zero tax on all the capital gains for the previous 18 years (depending on how much of a capital gain they have). Zero capital gains ever paid vs having capital gains paid by the parent at the parent's marginal rate when they gift it. So yes, it certainly can work out to less tax (provided you go with high growth low-yield assets).
Don't you pay a heap of tax once you make $450
define "a heap of tax"
Heaps is 66% Its $416 not 450 my bad https://atotaxrates.info/individual-tax-rates-resident/children-tax/
Which, at say 4% average dividends, means $10,000 invested - so may not be a concern for OP.
Maybe depends on if he is only investing that much, and of course some other etf will distribute more, didn't vdhg distribution at 10% last year. It was just a warning to the op that tax hits at quite a low threshold
I posted this in another thread before: > If you have kids and wanna open an index fund on behalf of them (giving them a head start and all), choose a minor trust account and purchase funds that allow DSSP e.g. AFI. Any gains or dividends share repurchase from a DSSP will not be taxed at all. > > A lot of people on this sub sometimes hastily chooses to open a minor trust share account for their kids but then proceed to buy all sorts of index funds, like vanguard, without realising what are the tax implications or even considering how much it can erode future gains. For example, any profits above $416 per year for a minor will be added to the parent's income tax thus can incur up to 66% tax if you are on the highest bracket! > > DSSP or nothing. :) Link to comment thread: https://www.reddit.com/r/AusFinance/comments/o8mf9h/what_are_some_relatively_unknown_tax_tips_you_can/h36gq8l/?context=3
>DSSP or nothing. :) You can also choose international indexes which tend to have very low distributions. Using AFI DSSP with VGS at say 40/60 will result in extremely low distributions while allowing you to remain globally diversified. You cold even swap out some VGS for VISM/IVE/IJH/IJR for even lower income.
WHF do it as well
thanks so much!