Giving your kids a head start

When it comes to helping your children or grandchildren get a financial headstart in life there are many options available, however your generosity could create tax issues down the track. Here we explore this topic from a few different angles, depending on how you wish to help them.

Education

If you want to guarantee that money invested for a specific purpose in your child’s life is used for that intention, there are a number of ways to make sure this happens.

If you look around, there are plenty of investment products aimed squarely at helping parents save for education. They are often referred to as education savings plans or child endowment bonds or a variation of those themes. The savings plans can be set up to transfer to the child’s name at an age specified by you.

Many of these funds charge minimal fees and the funds can be used for paying for books and uniforms, repaying HECS debts, and for purchasing musical instruments and lessons. Endowment bonds mature when the child reaches a certain age. They are held in the child’s name and as they are insurance bonds, they provide additional tax concessions.

Home ownership

Due to the increasing difficulty faced by many young Australians in saving for their first home, assistance from family members is likely to become more common.

A facility is available which enables parents to help with the purchase at no direct cost to themselves. The “family guarantee loan” allows parents, or another family member, to use theirown home as security on their child’s mortgage.

If you choose to act as a guarantor for your child’s mortgage, be aware of the implications. As guarantor, you are responsible for the loan if your child cannot meet repayments. Another option that places less risk on your assets is to lend your child money to make or increase their home deposit. Combining a parent loan with the first homeowner grant can make a substantial impact on the life of the mortgage.

If you would prefer to give the gift of knowledge, make sure your offspring are aware of other opportunities such as First Home Buyer savings accounts whereby they can save their own deposit faster by receiving higher interest and paying the lower tax rate of 15% on those earnings.

Accessing tax breaks

Parents may be well aware of the value that spreading income across family members can have when it comes to tax time. But beware: the Australian Tax Office ensures money is not placed in children’s names purely to get Mum and Dad a tax break. For this reason, it can apply more aggressive tax rates for passive income invested in the name of a person under age 18. So when setting up any investment in this way, make sure you check with your adviser first.

The key to giving your kids a leg-up is to have a clear objective before you start. With so many options available it can get confusing so be sure to talk to your financial adviser before jumping in.

(Sources: ATO website – First Home Saver Accounts, Guarantor Home Loan website – www.savingsaccountreviews.com.au, www.smh.com.au – Money Tools & Guides)

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