Generation Next: Supporting the grandkids

Annette Sampson interviews Adnan Glinac, executive general manager for life and super at Australian Unity. Please remember that the ideas and information below does not take your personal circumstances into account, and seeking advice before making any decisions is important. This is not a guide – this is just a starting point to get you thinking about what could be beneficial for you, but consider this before giving your children financial help.              

Adnan Glinac, executive general manager for life and super at Australian Unity, says grandparents made up just 10% of those investing in its education funds back in 2012. But that figure is now around 25%. “It’s a tangible way to connect with your grandchildren,” he explains. “Many grandparents are looking for a way to get more involved.”

However, according to Glinac, when putting money aside for your grandchild’s future – for education costs, their first home deposit or something else –there are things to consider, according to the ATO, if a child under 18 owns shares a tax return may need to be lodged on their behalf.

As well as this, “Minors can’t personally buy and sell shares. ,” says Michael Hutton, a wealth management partner with HLB Mann Judd Sydney. “They have to be over 18. So you have to put it in your name, with the option of saying you hold it in trust for them.” 

Whether you’re looking at a savings account, share portfolio or another investment, Michael says you will be taxed on any income or profits the investment earns as if it were your own money. If you have retired and are on a low tax rate, this may not be a problem, but the income is also assessed when calculating your pension entitlements.

The government has also set up rules imposing high taxes on the ‘unearned income’ of minors (that’s investment income versus what they might be paid for doing a paper run), to stop adults from diverting income to children to avoid tax.

Adnan explains that once a child earns more than $416 in a year in investment income, they are hit with a penalty tax rate of 66%. That drops to 45% for amounts over $1,307, but this is often much more tax than the grandparent would pay. Income paid to a child from a trust is also subject to these penalty taxes, he says. 

A super option?

According to Michael, a simpler option can be to use a tax-paid investment, such as superannuation or an investment or education bond. “If you’re retired, you have access to a tax-free investment vehicle in super,” he says.

“If you have a self-managed super fund you can also ‘earmark’ a particular investment for a child and give it to them later on to fund their education costs.”

If you die, you can leave the child the money in your will and direct your super to be paid to your estate – though Michael adds some tax will usually apply if this happens.

Investments for the grandkids

Tax-paid investments, which include education bonds, are also growing in popularity, Adnan explains. He says you can choose among various investment options, and if the fund buys investments with further tax advantages, such as shares paying franked dividends, this further reduces the tax paid within the fund. After 10 years, all money in the bond can be withdrawn tax-free, regardless of whether it is used to pay for education, housing, or something else.

Paying for education expenses

But Zenith Investment Partners investment analyst Pelin Demir says education bonds have a unique tax benefit on top of this. “[The concession] effectively recovers the tax paid on investment earnings when they are withdrawn to pay education expenses,” she says. “This can be worth up to $30 for every $70 of withdrawn earnings.”

Adnan adds that this special ‘education benefit’ can be withdrawn at any time, as long as it is used to fund education expenses. “If you need, for example, $1,000 to buy uniforms for your grandkids you can do it, even if they are still minors.” Adnan explains that the definition of education expenses also covers extras like materials, student union fees and tuition costs.

Share portfolios

Starting up a share portfolio is another option for grandparents, especially if they want to try to improve their grandchildren’s financial literacy by involving them in monitoring how the investment is performing. But Michael says you need to consider the administration and tax consequences. “They can be messy,” he says, adding that with a managed fund account, you can get a broad investment portfolio and a lot of the administration is done for you.

According to Adnan, Exchange-traded funds (ETFs) that track a particular share index are a low-cost way of giving a child the benefit of a share investment. Or for older grandchildren, who may, for example, be doing part-time work while still studying, there is another option. “When they have their own super fund, consider making a contribution to get them started,” he says. “Even $1,000 now will make a massive dent in their retirement costs in 50 years.”