Noel Whittaker, Director of Whittaker Macnaught Pty Ltd
Noel Whittaker, Director of Whittaker Macnaught Pty Ltd

Warnings on Children's Tax

Changes to children’s tax announced in this month’s budget mean anybody investing for their children or grandchildren will need to consider new strategies.

Until now, thanks to the Low Income Tax Offset (LITO), a minor could earn $3335 a year tax free – this is equivalent to having about $55,000 in the bank.  From July the amount that can be earned tax free by a minor will reduce to $416 a year – about $6,500 in the bank.  Once this limit is exceeded, penalty tax at the top marginal rate is applied. 

This creates a dilemma for parents and grandchildren.  If you invest in your own name it may reduce your family tax benefits or put you into a higher tax bracket, if you invest in the child’s name as trustee the penalty tax will still be payable. 

This is why I believe insurance bonds will become the preferred investment for anyone investing for minors.  The bond funds pay tax at 30% on their earnings, but as the profits accrue in the form of bonuses, there is nothing to declare on your tax return each year. 

This means you can’t fall foul of the dreaded children’s tax.  

After ten years the bonds can be cashed in tax free, but if they are cashed in earlier, the accrued profits enjoy a 30% rebate which makes them tax free for most people anyway. 

They can also be transferred CGT free at any time you deem appropriate. 

There are a wide range of insurance bonds so make sure you take advice as to which one is most appropriate for your own situation.  


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