Key issue in investing for kids

It’s quite common for parents or other relatives looking to give children a headstart in life to invest money on behalf of the kids from an early age. That way, a nest egg can accumulate which the child can draw on once they reach adulthood. A question that often arises is who pays tax on the income: the child or the parent?

To find out the answer, it’s necessary to consider who provided the funds for the investment, who receives the investment income (regardless of who it is spent on) and who makes the investment decisions.

For the child to be liable for tax, the income must belong to the child and the assets that produce the income must also demonstrably belong to the child. Indications that this is the case include:

Assets are acquired or savings accounts are opened in the child’s name. A strong indicator is where the money in a savings account was actually earned by the child, for example from a part-time job. The child’s TFN is quoted.

The child has access to the funds and can use them as they see fit.

If the parent provides the original funds and then receives the investment income (even if they decide to use it for the benefit of the child), the income is treated as belonging to the parent and must be disclosed. Similarly, any capital gains or losses must be reported by the parent.