Children will be slugged tax on unearned income


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Investment and similar income earned by children under 18 no longer benefits from the Low Income Tax Offset.

As a result, children whose unearned income exceeds $416 a year - a level first set in 1981 - are now taxed at penalty rates of between 45% and 66%.

One way for parents to avoid this involves arranging for their children to invest mainly for growth rather than income, perhaps by buying shares in quality resource stocks rather than, say, in banks.

Another option centres on giving money to their grandparents to invest, either because the grandparents are on low marginal tax rates or, preferably, because they are able to add it to their superannuation savings.

Since they are likely already to have access, or soon will have access, to their super the money will be available to be withdrawn tax free.

For older parents it may be sensible to put money away for children by salary sacrificing into their own super since this should be accessible in the near future.

If this isn't an option, investing a child's savings in the name of a parent with a low marginal tax rate may be a possibility.

Yet another alternative is to invest in an insurance bond or education fund. In most cases the earnings will be taxed within the fund, usually at a rate of 30%, but the money is locked up for many years.

Most insurance bonds, for example, effectively have terms of eight to 10 year.

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Peter Freeman is a former managing editor of The Australian Financial Review. He runs his own self-managed super fund.

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