Ask Paul: I bought shares for my kids - who pays the tax?
Jason: Can you please explain the taxation implications for purchasing shares "in trust" for children (below the age of 18)?
Who receives the franking credits? Parents holding the shares in trust or the children? If the children receive the franking credits, are they then required to submit a tax return to reclaim the company tax paid?
My daughters are nine and six and hold shares in Westpac, NAB and Telstra. The expected gross dividend income for the year is $700.
Also, would you recommend a dividend reinvestment plan (DRP) or cash for dividends?
Paul: Good questions, Jason. Buying shares for the kids is a great idea.
My parents did this for me and so did my wife and I for our kids. Whoever holds the shares, whether "as trustee" or not, pays the tax. We held our kids shares "as trustee", then transferred them when they turned 18.
No capital gains tax is payable on this transfer as the "beneficial owner" does not change. This meant we paid tax on their dividends but it was not a big deal thanks to the franking credits.
I do like DRPs for kids, as it really helps to grow the investment. But you do need to hang onto the records as each DRP buys shares at a different price and date in terms of future capital gains tax calculations.
I can't tell you enough what a great idea this is. By doing this for me, my parents kickstarted me into a property and business.
It also gave me knowledge of sharemarkets.
Our three kids are now adults and the money and knowledge built up over 20-plus years in shares has been a great help to them.
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