Ask Ban Tacs Question
Is it possible to buy shares in a child’s name when they are aged between 0 and 17. More particularly 0 and 7ie the child is unable to sign the TFN application. As I understand if the shares are bought in the name of a parent atf the TFN used is the parent’s and the income is declared in the parent’s return.
Is there any way that the share/s can be bought in the name of the child? I know there there is a higher tax rate beyond $1666.66 for 2007-08 and $2.666.66 the next year. (As per API July 2008 magazine)
I would not to set up a discretionary trust for the small amount of capital that would be invested in the parcel of shares. Even if I did I would still have the problem of obtaining a TFN for a child who cannot sign the application or for that matter the income tax return.
Please advise.
Cec Woodhouse
Answer
For children under 16 you can put their date of birth in the box for the TFN and this should be acceptable, at least that was what the government argued when the TFN reporting regime was introduced. Managed funds will not accept investments from people under 18 and they are going to know this from the statement of advice but I have never been asked my date of birth when buying direct shares. Nevertheless, this brings you back to the TFN problem, putting the date of birth in will probably give the game up. There is no minimum age to obtaining a TFN. The parent can sign the application form and the tax return on behalf of the child if necessary.
You do not have to go to the lengths of setting up a discretionary trust to hold the child’s shares. You can hold them for him or her as a bare trust. This means that your name simply appears on the shares as trustee for him or her because they are under a legal disability ie a minor. You just need to keep documentation verifying you were holding them in trust. A bare trust has an advantage over a discretionary trust in that if when he or she is 18 you want the shares to be in his or her name there is no CGT event because they were always effectively the child’s shares.
If you hold the shares in your name in bare trust for the child and he or she is your child or gran child then, at law, the shares are considered yours for tax purposes (revocable trust). Fortunately, the ATO have issued a couple of statements saying they won’t enforce the law quiet that strictly if the asset really does belong to the child ie the parent or gran parent never actually uses the money for their own purposes. IT2486 looks at money in a bank account where the parent is trustee and examines where it came from and whether the parent uses the money. If the money is clearly kept as the child’s then the ATO will allow it to be taxed in the child’s name. There is also an ATO fact sheet that says basically the same thing in regard to shares. Note both the fact sheet and the ruling make it clear that the more money in the account the more likely they are to consider it the property of the parent. This is not too bad as considering the penalty tax rates applicable to minors the more money invested the more likely you are to want it to be considered yours instead anyway.
If I were you I would apply for a TFN for the child with the parent’s signature. When you make the investment use your name if they won’t let you use the child’s but try to add the words ‘as trustee’ if you can, otherwise your name will do. Use the child’s TFN this will be evidence of the trust relationship and keep the confusion with the franking credits to a minimum. Lodge a normal tax return for the child including the dividends and claim the franking credits back. If any questions are raised as to why you have not lodged a trust tax return, explain that it is simply a bare trust. Make sure you never use the money for your own purposes and you should be right.
