A Few Simple Tips For A Big, Fat Piggy Bank

Sun Herald

Sunday January 20, 2008

Debra Cleveland

Teach your kids savings and investment habits for life with this guide from Debra Cleveland.

FOR many families, January is a time of getting one's house in order - bringing the household budget back on track, setting savings and investment targets for the year and helping the kids get into good savings routines as well.

Whether your children are littlies or already working part-time, it's never too late to lay down healthy investment habits. This can be done via buying shares in their name or an investment for them that can be added to over time.

Either way, as their parents, there are a number of technical issues you'll need to understand. Let us be your "one stop shop" - have pen and paper ready to make a "to do" list and start implementing it tomorrow.

And keep things simple - the more elaborate your plans, the less likely you are to follow through.

THE NAME GAME

The advice can be confusing here, with some advisers saying children can hold shares and managed funds in their own name and others saying not until they are 18.

The first bunch are wrong - minors cannot enter into a legal contract, says Bill Nussbaum of HLB Mann Judd, so investments have to be held in parents' names until their offspring reach adulthood.

Typically the parents act as trustees, says Nussbaum, and so the account would read, "Fred Bloggs in trust for Harry Bloggs". For tax purposes, any income from the asset would be taxable in the name of the child (see below) and once the child turns 18, the asset can be passed on to them with no tax implications. In other words, no capital gains tax is payable.

TAXING ISSUES

There appear to be two different earnings levels for children in terms of tax - one is when tax kicks in on wages (for delivering the local newspaper, for example, or working at a supermarket part-time) and the other is the tax threshold for "unearned income" or "passive" earnings from investments.

When it comes to income from investments, an invaluable and easy-to-follow guide to tax laws, Taxpayers Australia Tax Summary, states the most a minor can earn before paying tax is $1666.67 (taking into account the $750 low-income tax offset for 2007-08). After that, tax is tiered between 66percent and 45percent.

As for investment income, there is a case for lodging a tax return even if earnings fall below the thresholds. If you don't, says Tony Greco, chief executive of Taxpayers Australia, any dividend imputation credits will go to waste.

"You'd be silly not to claw back that credit," says Greco. "Assuming a fully franked dividend, for each $100 of dividends the imputation credits are worth $42.85.

"This is going begging so even though your child may not be required to lodge a tax return, you should do so to get the refund."

WHERE TO PUT IT

It would be wonderful to be able to buy a small amount of shares in a company that had meaning for your child - for example, a listed organisation that made toys, software or kids' snacks or owned theme parks.

This way, often there is already a keen interest and understanding of how the company works, and it makes for a good foundation in learning how the sharemarket works. The drawbacks are that this strategy doesn't offer diversification - it's harder with a smaller sum of money to buy across a number of companies and so spread any investment risk.

And many argue that brokerage on small sums is disproportionately high. One of the cheapest ways to buy, though, is through CommSec, where the minimum brokerage is $19.95. Yes, on a sum of $500 the brokerage would be almost 4percent but it might be worth the lesson.

There is no minimum parcel of shares you have to buy, says Commsec - if you really wanted to, you could buy one BHP or one Macquarie Bank share.

Or invest in a managed fund (see our case study). Most have minimum amounts of about $1000 which you could either put up yourself or encourage your child to build up via savings or earnings from a part-time job.

Compound interest does wonderful things, even for small investments. We asked financial adviser Lance Swansbra of Forsythes to look at what would happen to an initial investment of $1000 over 10 years where an extra $300 was added to the fund each year.

Assuming a return of 7percent (including 4percent in franked dividends), you would end up with $6268. That's $4778.71 in today's dollars, based on 2.75percent inflation.

CASE STUDY

Wealth lessons for Angus, 11

SALES improvement coach Ian Ritchie has started his 11-year-old son Angus's path to wealth creation by setting up for him a managed fund investing in Australian shares.

They've kicked off with the minimum $1000 typically suggested by many managed funds and they can add to the investment as time goes on.

Like many other funds, Colonial First State's Australian Share Fund has a $100 minimum regular monthly contributions although you can make irregular "top ups" for which there is no minimum.

"We wanted to create a little share portfolio for our kids but with small amounts of money it's hard to do that buying shares directly," says Ian, director of consultancy Process2Customer. "It would have been great to research with Angus individual companies and talk about what each was doing in the market, so a managed fund is a bit removed from that.

"What Angus does have, though, is diversity. Rather than buying just two or three shares with $1000 (and paying brokerage of at least $19.95 each time), his investment gives him exposure to a basket of Australian shares.

"We sit down each time a new statement arrives and talk about what it means and what must have happened on the stock market for that money to have been earned," says Ian.

"Angus knows he owns a tiny bit of a number of companies and that companies are divided into shares which represent ownership. It's quite good for kids to realised that and understand how economic activity works."

© 2008 Sun Herald

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