So, I was just writing an article for the mortgage arm of our business about why it’s a good idea to consolidate all the family’s savings in the once place – your home loan or offset account. In short, it was a very quick (just a few lines) summary of what I’m writing here – why you should steal all your children’s money and use it for yourself.
If you think of the current tax regime, it’s not very nice to children that invest. Thankfully as a kid, my parents didn’t allow me to invest in my own name until I was 18 years old. I had no idea about the tax implications of having investment income. Now that I do – woah – let’s make sure that we don’t let kids invest, I mean, that’s a bad skill to learn until you’re 18! A child or minor can earn up to $416 tax free in any one year from non-employment income. After that, they’re going to be lucky to contribute to the government coffers to the tune of 68% up to $1,307. After that, they’re then paying 47% income tax on everything else. Minor income tax rates are certainly a hidden trap!
So – what’s the better option I hear you ask? Simple, steal the money off them. If your child has a significant gift register that they’ve accumulated over a number of years, you’re going to want to ensure that they’re getting a good return on their money. The greater the return, the greater the risk, right? How does 4.5%, fixed, guaranteed tax free? Certainly seems better than the paltry 3% that you’re getting on term deposits, which you then have to pay tax on. ASX listed shares will give you a 3-4% dividend yield which will sometimes be franked (don’t know who Frank is? I’ll cover that later). But you’re going to get risk with that. Property will yield you 3-5%, but you’ve got tax to pay and sometimes the expenses can be pretty high.
So, how on earth can you get 4.5% guaranteed return tax free? Simple, take the money and put it off your home loan. Simple. $100 off a home loan is going to save you $4.50. You won’t pay tax on it, and it’s a pretty fixed amount. Furthermore, the money that you’ve saved isn’t going to add to your taxable income, so it’s tax free.
If you invested $100, let’s say you earned 8% on the money. You’d then have to pay tax (let’s assume you’re on the top tax bracket) so your $8 return will net you $4 after tax. You’re also taking more risk to make 8% on your money – it really doesn’t compare does it.
There is a saying out there saying united we stand, divided we fall – well, your money has the same motto. Get it all together, yours, your partners, the kids – hey, if the dog has savings get them into the act too. Put it all to work and move things forward faster. The one key thing to remember is that your children’s future is potentially going to be partially dependent on your financial capacity. Don’t worry too much about making sure that little Junior has their own bank account, just worry about building up the family finances so that you can write the cheque you want, to whom you want, when you want.
There you go Junior, over to you.