Children’s share investments
Quoting a tax file number
When you buy shares, you have a choice whether you quote a tax file number (TFN).
If you quote a TFN, you pay taxes on the dividends when you lodge the tax return. If the shareholder is the:
child, quote the child's TFN
parent, as trustee for the child, and
no formal trust exists, quote the parent's TFN
there is a formal trust, quote the trust's TFN.
A child can apply for a tax file number (TFN) – there is no minimum age. Children are not exempt from quoting a TFN.
If you don't quote a TFN, pay as you go (PAYG) tax will be withheld at 47% from the unfranked amount of your dividend income.
Declaring dividends
Whoever rightfully owns and controls the shares declares the dividends and any net capital loss or gain from the sale of shares. You need to consider who:
provides the money for the shares
makes share decisions
spends the dividend income.
If there are large amounts of money or a regular turnover, you might need to examine the ownership of the shares further, including finding more information to work out who should declare the dividends.
If parents or grandparents hold shares for a child, they are treated as the owners of the shares, unless the child is the genuine beneficial owner. If the child is the beneficial owner, you should declare the dividends in the child's tax return.
Income from shares is treated differently to income from interest (for example, from Children's savings accounts).
Example: parent uses dividends
Peter withdraws $3,000 from his own bank account to buy shares in the name of his daughter Georgia. Peter quotes his TFN when he buys the shares.
He deposits the dividend of $200 into his own bank account and uses it for his own personal expenses.
Peter declares the $200 in his tax return. When he sells the shares, he will also declare any capital gain or loss.
Example: dividends reinvested for child
Sara buys shares for her child, Michael, with money given to him for his birthday. Sara holds the shares for the benefit of Michael with the share broker until he turns 18. No formal trust deed has been created. Sara quotes Michael's TFN when she buys the shares.
All dividends have been reinvested through a dividend reinvestment plan.
The dividends are declared in Michael's tax returns.
When Michael turns 18 years old, the shares will be transferred to him through an off-market transfer. As he remains the beneficial owner of the shares, there will be no capital gain or loss for either Sara or Michael on the transfer.
Lodging a tax return
If your child owns shares and earns more than $416, you must lodge a tax return on their behalf.
If your child earns $416 or less, you may need to either:
lodge a tax return on their behalf if too much PAYG tax was withheld
claim a refund for franking credit by lodging a tax return or completing an Application for refund of franking credit.
In some circumstances children's income is taxed at the highest marginal rate. For more information about tax rates for people under 18, see Your income if you are under 18 years old.
Example: declaring dividends in child's tax return
Simon withdraws $5,000 from his bank account to buy shares in the name of his son Jordan. He quotes Jordan's TFN when he buys the shares.
Simon makes all the decisions about those shares as Jordan is only 3 years old.
All dividend income and any profit from the sale of those shares are deposited into a bank account in Jordan's name with Simon as trustee.
The dividends and capital gains are declared in Jordan's tax return.
Example: child with part-time job
Jenny buys shares on behalf of her daughter, Talia, with money saved from Talia's part-time job, plus money received for Talia's birthday. Talia and Jenny decide not to quote Talia's TFN.
Dividends of $500 are deposited in Talia's bank account.
Talia declares the $500 in her tax return. She will need to make an adjustment in her tax return so that the proportion of the dividend that relates to shares acquired with her employment income is taxed at normal tax rates. The proportion that relates to shares acquired with the gift money is taxed at a higher rate. When those shares are sold, any capital gain or loss from the sale will belong to Talia.
Contact us if you have any questions.
Source: ato.gov.au
Reproduced with the permission of the Australian Tax Office. This article was originally published on https://www.ato.gov.au/individuals-and-families/investments-and-assets/shares-funds-and-trusts/investing-in-shares/children-s-share-investments
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