The high tax paid on children's bank accounts can be avoided, writes George Cochrane.
WE HAVE primary age foster children in our care, so to give them a bit of help later on we bank $150 a month into their accounts. This has grown to more than $10,000 each. We are now informed that any interest earned on these accounts above $416 a year is taxed at 66 per cent. This information comes from the Tax Office. Is there any other way of investing this money without paying this much tax? We thought we were trying to teach the children how to save. J.F.
Your advice is correct in that children under 18 can no longer access the low income earners tax offset that counteracts the first $1500 of tax. The classic way of reducing tax is to buy shares paying franked dividends but with the state of the markets, and my fear that share prices have further to fall, this is not a good time to invest your children's money in shares.
If you are saving in an online account, you may be earning around 4.75 per cent from a bank, putting you over the $416 limit. Since you or your spouse are likely to be paying tax at a lower rate, why not invest a portion of the money in your names, possibly using a term deposit paying, say, 6 per cent? It might be a good idea to move soon if, as is forecast by some analysts, interest rates may be cut some time in the near future. By explaining all of this to the children, you will also be educating them that tax and timing are major factors when saving money!
Super best bet for future
I AM 40, single, earn $55,000 and work in the community sector so am able to salary package 35 per cent of my salary towards my mortgage it will be paid off by mid-2012. My property is worth about $400,000 and I have $110,000 in superannuation. My question is about what to do after my house is paid off and how to build wealth/security. My two main options seem to be either to buy an investment property or to salary package a significant amount of my wage into superannuation. I am tending towards the latter option as I am excited by the thought of being debt-free and so am unsure about taking on another loan! What do you think is the best strategy? K.H.
Sounds like you work for a hospital or a "public benevolent institution", which is allowed to provide its employees with a certain amount of tax-free fringe benefits. Remember that superannuation is an exempt benefit under FBT rules and is not included in the FBT-exempt, grossed up thresholds of $17,000 for hospitals or $30,000 for PBIs and health-promotion charities, so seek advice when considering FBT and super contributions.
You should concentrate on long-term savings within your super fund and plan to put in as much as possible. Also, I would be switching into the cash option within your super fund under current market conditions.
Once your mortgage is paid off, aim for the maximum $25,000 a year salary sacrifice into super, even though this may take you below the $37,000 threshold between the 15 per cent and 30 per cent tax brackets. If you find that cash is building up in your account after paying off the mortgage, consider how you could renovate to improve the value of your home.
If you have a question for George Cochrane, send it to Personal Investment, PO Box 3001, Tamarama, NSW 2026. Helplines: Banking Ombudsman, 1300 780 808 Pensions, 13 23 00.
Frequently Asked Questions about this Article…
How is interest on children's bank accounts taxed in Australia?
According to the article, any interest earned on a child's bank account above $416 a year is taxed at 66%. Children under 18 can no longer access the low‑income earner tax offset that previously helped offset the first $1,500 of tax.
What low‑tax investment options can reduce tax on kids' savings?
A classic low‑tax approach is investing in shares that pay franked dividends (which carry imputation credits). The article also suggests investing a portion of the savings in a parent’s or spouse’s name — for example a term deposit paying a higher rate — so the interest is taxed at the adult’s lower marginal rate.
Is now a good time to invest my child's savings in shares with franked dividends?
The article warns that current market conditions and the risk of further share price falls make it a poor time to move children’s savings into shares. While franked dividends can reduce tax, the author recommends caution given market volatility.
Can I put my child's savings in my name to avoid the high tax rate on their interest?
Yes — the piece advises that, since you or your spouse may pay tax at a lower rate, it can make sense to invest a portion of the funds in your names (for example in a term deposit). That strategy can reduce the tax hit compared with leaving all the money in the child’s account.
How do changing interest rates affect decisions about kids' savings?
Interest‑rate forecasts matter: the article suggests moving funds into a term deposit paying a competitive rate soon, because some analysts expect official rates to be cut in the near future. Locking in a higher rate before cuts could help preserve returns.
What should I consider doing with my money after my mortgage is paid off?
The article recommends concentrating on long‑term savings inside your super fund and making as much contribution as you can. It suggests aiming for the maximum $25,000 a year salary‑sacrifice into super once the mortgage is paid, and also considering home renovations if cash is building up to improve property value.
How do fringe‑benefit rules affect salary‑sacrificing to super if I work for a hospital or PBI?
If you work for a hospital or a public benevolent institution (PBI), your employer may be allowed to provide tax‑free fringe benefits. The article notes that superannuation is an exempt benefit under FBT rules and is not included in the FBT‑exempt grossed‑up thresholds of $17,000 for hospitals or $30,000 for PBIs and health‑promotion charities — so seek tailored advice when considering FBT and super contributions.
Where can I get help or ask questions about banking, pensions or the advice in the article?
The article lists helplines and contact points: Banking Ombudsman on 1300 780 808 and Pensions on 13 23 00. It also invites readers to send questions to Personal Investment, PO Box 3001, Tamarama NSW 2026 (for questions to the columnist George Cochrane).
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