Investing for your child can help kick start their future. But there are a range of questions that you should ask yourself before starting, such as:

1. Who will be responsible for the tax impact?
2. What tax rates will apply?
3. What would you intend the money to be used for?
4. How long will the money be invested for and what level of volatility are you willing to adopt?
5. What investment structure is most appropriate?

We can see per the above that this is not a simple area and can be fraught with both positive and negative financial and familial impacts.

So what are some of the benefits of investing for your child:

1. You can in some cases invest quite tax effectively for the benefit of the child.
2. You can set aside money to fund the child’s education tax effectively and to the benefit of your future cash flows.
3. You can help to establish a financial base (A head start) for your child that with sound financial management will see your child’s future financial burdens lessened.
   
   

Considerations

1. Investing directly in your child’s name can lead to penalty tax rates, the use of certain financial products and accounting structures can lessen this burden.
2. The purpose of the investment must be clearly defined along with the timeframe expected and the financial outcome required to meet the objective, this will impact on the chosen risk profile, and method of investment.

If you invest in a child’s name directly, with certain exceptions the following penalty tax rates will apply:

Child’s taxable income	Penalty tax rates
$0 – $416	Nil
$417 – $1,307	66%* of each $1 over $416
$1,308 and over	45%* on the entire income

* Medicare and other levies may also apply.
* Unless the income originates from an exempted source.

The result of these tax rates is that the child can only earn up to $416 in a year before all income is effectively taxed at the top marginal tax rate. The outcome of the above is that parents can no longer reduce their personal tax by diverting money to their children.

Investing for a child can be both tax effective and a source of security for your child’s future when implemented correctly’, but when done without foresight it can result in excessive tax and failure to meet the intended outcome.