Many parents want to create a brighter financial future for their kids, with shares being a great way to help their children get ahead in life.
Even with the current volatile market, buying shares over the long term offer potentially higher returns than a bank account – albeit with a greater level of risk.
But buying shares for kids isn't as easy as you might think. Unfortunately, many brokers won't allow you to open an account for anyone under the age of 18. Add to it a complex tax environment mainly aimed at stopping adult investors from using their children to offset taxable income and suddenly, you have a lot to consider before you start investing for your children.
To help you out, Finder has come up with this handy guide for those looking to invest in the stock market for their kids.
Can children own shares?
If you're planning on buying a parcel of shares and giving them to your child straight away, it's not that easy. Most brokers won't allow you to buy shares in your child's name, even though the Australian Taxation Office (ATO) says it is possible for children to own shares.
High tax rates also apply on investment income (e.g. dividends) earned by minors, so you'll need to consider other options if you want to buy shares for your children.
Let's take a closer look at a few of the available choices.
Open a share trading account
The first option when you want to set up a stock portfolio for your children is to open an online share trading account. However, instead of opening the account in your child's name, you can open a "minor" account in your own name and act as a trustee.
Once your child turns 18, you can then transfer the shares into a brokerage account held in their name. The advantage of this approach is that capital gains tax typically won't apply when you transfer the shares to your child – the shares were always meant for them, so there's no change in beneficial ownership.
It's also easy to set up a trust account. With CommSec, for example, you can select "Trust" when choosing what type of account you'd like to open.
An alternative option is to simply invest in shares in your name via your own online trading account. Then, once your child reaches 18 years of age, you can transfer the shares to them via an off-market transfer – a private transaction that doesn't take place through the share market. However, you'll need to pay a fee that varies from approximately $25 to $60. Gifting shares is also classified by the tax office as a capital gains tax event.
Finder survey: How old were people when they first invested in the stock market?
Response
Female
Male
I have never invested in the stock market
46.6%
28.39%
18-24
12.11%
18.55%
25-29
12.27%
17.81%
30-34
10.28%
11.32%
35-39
5.47%
6.86%
40-44
4.48%
5.94%
45-49
2.82%
2.6%
50-54
1.49%
2.6%
Under 18
1.99%
2.23%
55-59
1.16%
1.86%
60+
1.33%
1.86%
Source: Finder survey by Pure Profile of 1145 Australians, December 2023
Important: The standard brokerage fee displayed is the trade cost for new customers to purchase $1,000 of either Australian or US shares. Where a platform charges different fees for both US and Australian shares we show the lower of the two. Where both CHESS sponsored and custodian shares are offered, we display the cheapest option.
If you're new to investing or just want to take more of a hands-off approach, you may want to sign up for an account with a robo-advice service. Robo-advisors are essentially digital investment advisers that automatically manage your investments on your behalf based on your appetite for risk and financial goals.
Once again, it's possible to use a robo-advice service to invest on your child's behalf. The investments are held in your name for legal and tax purposes, but you act as a trustee for your child until they turn 18.
Of course, you'll need to consider any monthly or annual fees the robo-advisor charges as well as whether there's a minimum investment limit. Check out our comprehensive guide to robo-advisors for more information.
Set up a trust
For some parents, the best approach may be to set up a discretionary family trust. The trust then purchases shares, ETFs or other investments and your kids can be made beneficiaries of the trust.
Setting up a trust can provide tax benefits, but it can also be a complicated and expensive exercise. For most mum and dad investors who are creating an investment plan for their children, other approaches are simpler and more affordable.
However, if you think a trust could be worthwhile, contact your accountant or financial adviser for details on how to get started.
How to gift shares to children
Another option is to build an investment portfolio in your own name and then gift those shares to your children once they turn 18. Your child can then hold the shares in an account in their own name or cash out the investments to spend the money elsewhere.
If you're considering this approach, it's a good idea to check with your broker to find out the process you'll need to complete to transfer shares to your child. Some brokers make it as simple as filling out an online form.
But remember to check the fees and capital gains tax. For example, if you're paying $3 in monthly fees on a birthday gift of $100 for the child, you'll have paid a third in fees or $36 by the time your child's next birthday has come around.
Insurance bonds, also known as investment bonds, are offered by insurance companies and friendly societies. These long-term investments are similar to super funds and they combine an investment portfolio and a life insurance policy in a single package.
You can nominate the date when ownership of the bond is transferred to your child while investments within the bond are taxed at a rate of 30%. And if you hold the bond for at least 10 years without making any withdrawals, no further tax applies when you do decide to withdraw the funds. However, you will need to be aware of annual investment management fees.
Tax implications when investing for children
As you've no doubt gathered by now, there are many tax implications to consider no matter which investment option you select for your kids.
The person that owns and controls the shares must declare any dividends as well as capital gains and losses from share sales to the ATO. But it's worth noting that the ATO has rules in place to stop parents from trying to dodge their tax responsibilities by hiding investments in their child's name.
As a result, if your child holds shares in their name and earns more than $416 in investment income during a financial year, you'll need to lodge a tax return on their behalf. Unfortunately, they can be taxed at the highest current tax rate.
If a parent owns the shares in their own name or if the parent invests as a trustee, they must declare dividend payments and capital gains tax events on their own tax return. With this in mind, it's a good idea for couples to put any such investments in the lower-income earner's name.
Buying shares for children is a great way to help provide a more secure financial future for your kids, but it's also complicated. It's well worth seeking advice from an accountant to help you compare and choose investment options for your children.
Minors in Australia cannot directly own stocks and most platforms won't let you open an account for anyone under the age of 18. However, their parents can invest on their behalf. Major brokers in Australia will let you act as trustee for your children. Once the child turns 18, the shares can be transferred into their own name, although this usually involves a one-off transfer fee.
The ATO states that minors can earn up to $416 annually on investments held in their name before taxes apply. These are usually higher than the average adult's taxable income, going as high as 66%.
Yes, you can buy shares for children with CommSec, but you can't open an account in their name. Most brokers won't let children under 18 own shares directly. Instead, the parent can open the account as trustee for the child. When the child turns 18, the shares can be transferred into the child's name.
In the case of CommSec, you will be charged $54 per share when you transfer the shares into the child's name.
The earlier you can start investing, the better off the child will be. This is because of how compound interest works. Let's take 2 examples using the money smart calculator.
First you start investing when the child is born, giving them 18 years of compounding. If you initially invest $1,000 and add $100 a month, the child and compound 9% per annum on their 18th will have $58,658 in their trustee account with $36,058 coming from interest.
Now say you start when the child is 12. Once again, you invest $1,000 initially and $100 per month. Again at 9% the child would get $11,213 on their 18th birthday with $3,013 in interest.
Tim Falk is a writer for Finder, writing across a diverse range of topics. Over the course of his 15-year writing career, Tim has reported on everything from travel and personal finance to pets and TV soap operas. When he’s not staring at his computer, you can usually find him exploring the great outdoors.
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