Until recently, $66,000 invested in your child’s name meant your child could “earn” up to $3333 each year tax-free (assuming a 5 per cent return). It was great for parents wanting a tax-effective way to help with school fees and other child-related expenses, from July 1, 2011, parents have no longer been able to split income with their children, as kids under 18 won’t be entitled to the low-income tax offset on unearned income before paying tax.

Only $416 will be eligible as “unearned” income.

Hard-earned income is safe

The change does not apply to money actually earned as a result of paper rounds, part-time retail work or other jobs popular with young people – those tax-free thresholds remain the same.

An investment will now have to be more like $8000 to produce the tax-free $416. Anything over that and up to $1308 will be taxed at 66 per cent, with the rest being taxed at 45 per cent.

There’s no immediate rush for family trusts to reorganise their affairs, says Suzanne Haddan, managing director of BFG Financial Services, because they have until the end of the 2011-12 tax year to make distributions and have time to decide on the next-best tax beneficiaries.

A family using a family trust to make distributions to two children will have to pay an extra $2713 in tax, says Haddan.

Act quickly on investments

But for those who hold investments or cash accounts for their children, the message is act soon – especially if cash as earnings (interest) is received more regularly. If it’s structured that your child will receive $3300 and you do nothing, at the end of the next tax year you’ll face a tax bill of $1484, Haddan says.

Seek advice on changing ownership, says Deborah Wixted, senior technical services manager at Colonial First State. “The ATO says if you’ve set it up in such a way that the child is the legal owner and you’re holding [the investment] as trustee, and the intention is the money is for the child and their use, then the tax liability is the child’s,” she says.

Consider insurance bonds

Insurance bonds may be a better option for parents wanting to invest for children, says Louise Biti, co-founder of Strategy Steps. “Anyone investing in their children’s names in shares, unit trusts and bank accounts should rearrange things so it’s back in the parent’s name.”

“My gut feeling is quite a few people will be rearranging their children’s investments,” Haddan says.

Source: Australian Financial Review, written by Debra Cleveland