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Intergenerational Wealth

Investing for children

Chris Morcom
Partner/Private Client Adviser
6 Feb 2018

Often parents and grandparents want to give their children or grandchildren a start in life by putting away some money for them, which often ends up being money stashed away in a bank account. But with today’s low interest rate environment, is that the best place for an investment?

Probably not. The rate of return on such bank accounts is generally below the rate of inflation… in real terms the savings are going backwards.  And generally, most people have the intention that these savings are for the longer-term benefit of the recipients.

So what other options do people have?

Shares – long term outlook

Listed Australian shares can provide investors with longer term asset growth, as well as dividend income along the way.

Share parcels can be purchased for amounts as small as $500 and dividends can often be automatically reinvested into additional shares.

The reinvestment of dividends provides a way to compound the earnings over time at a low cost as share brokerage does not apply to reinvestment plans.

Listed investment companies such as Australian Foundation Investment Company (www.afi.com.au), Argo Investments (www.argoinvestments.com.au), and Milton Corporation (www.milton.com.au) can provide a way to get a broad exposure to the share market at a very low cost – the internal management fees of these listed investment companies is less than 0.2% per annum.

Such shares can be purchased via an on-line share broker and additional parcels can be purchased as more savings become available.

The key attraction with using a listed investment company to invest for children is the wide exposure to the market these companies provide, the relatively low cost of acquisition, the ability to add to the holdings over time and the tax effectiveness of fully franked dividends.

While the volatility in share prices can be a turn-off for people, for long term investors the volatility can be an advantage.  When share prices are low, the reinvestment of dividends or savings can purchase more shares, which leads to wealth growth when the share prices recover.

Property – assistance with entering the housing market

Many people are concerned about their children or grandchildren being able to afford the purchase of their first property.

There are a wide variety of options available:

  • The outright purchase of a property for a child now, held either in their name or in trust for them
  • A loan from a parent / grandparent to assist in the purchase of a property
  • A parent or grandparent guaranteeing all or part of the debt required to purchase a property
  • The purchase of units in managed unit trust that invests in property.

There are advantages and disadvantages with all options.

If lending money to children, or guaranteeing debt, you must first seek advice.  Such arrangements need to be covered by legal agreements to protect all parties in the event of the sale of the property, disability, death or relationship breakdown.


There are two main options in relation to the use of superannuation to grow the wealth of the next generation.

  1.  Provide funds for the children to make extra non-concessional contributions to their own superannuation fund.  This allows the next generation to build up their provision for retirement and benefit from the long-term accumulation and compounding of wealth in the highly tax effective environment of superannuation

    Superannuation also provides some protection against the risks of bankruptcy, which can be attractive for those young entrepreneurs who are taking big financial risks.

  2. A second option is for those wanting to provide for the next generation to accumulate wealth in their own superannuation fund and notionally “earmark” those funds for the next generation.

    For those over 65, amounts can be freely withdrawn from superannuation tax free to provide a gift to the child or young adult.  Investment earnings are taxed concessionally along the way, and the person giving the gift retains full control of the funds until the gift is given. 

    Such arrangements need to consider the timing of when gifts are going to be made and whether the person making the gift will have the ability to access their super to make the gift when desired.  Another consideration under such an arrangement would be the impact should the person planning the gift pass away prior to making the gift.

Ownership considerations

It is often not appropriate for those under 18 to own investments in their own names due to their inability to make decisions (due to their early age) and the penalty rates of tax that apply to underearned income for minors.  An alternative is for assets to be held in the name of their parent or guardian until they reach the age of 18.

A complexity arises when investments held in the name of a parent on trust for a child are transferred to the child when they reach 18 years of age. 

If the parent’s tax file number was quoted when the investments were held on trust, then the rise in value between time of purchase and time of transfer to the child would give rise to a capital gain…half of which would be taxable in the parent’s name.

If the child’s tax file number was quoted when the investments were held on trust, then there would be no capital gain realised when the investments were transferred to the child’s name.

For minors, income up to $417 is not taxable, income between $417 and $1,307 is taxed at 66%, and income over $1,307 is taxed at 45%. 

Consideration needs to be given the longer-term taxation implications of asset ownership. 

The right answer will depend on the age of the intended recipient, the quantum of the savings and the intent of the saver (grandparent or parent).  Seeking advice from a qualified financial adviser should be the first step to optimise the arrangements in place for future generations.


Hewison Private Wealth is a Melbourne based independent financial planning firm. Our financial advisers are highly qualified wealth managers and specialise in self managed super funds (SMSF), financial planning, retirement planning advice and investment portfolio management. If you would like to speak to a financial adviser on how you can secure your financial future please contact us 03 8548 4800, email info@hewison.com.au or visit www.hewison.com.auPlease note: The advice provided above is general information only and individuals should seek specialised advice from a qualified financial advisor. The views in this blog are those of the individual and may not represent the general opinion of the firm. Please contact Hewison Private Wealth for more information.