Most people approach this the same way. A child or grandchild is born, someone decides to put money aside for them, and the obvious step is to open an account or buy some shares in the child’s name.
It feels right. It is usually the worst available option.
Australia has a specific set of rules designed to stop adults shifting investment income to children, and those rules do not care that your intentions are good. They apply to the doting grandparent exactly as they apply to the aggressive tax planner. Understanding them first, before choosing investments, is what separates a plan that works from one that quietly bleeds value for eighteen years.
The rule that shapes every decision
Division 6AA of the Income Tax Assessment Act 1936 applies penalty tax rates to the unearned income of anyone under 18 at the end of the financial year.
The numbers are stark. The first $416 of a minor’s investment income is tax free. Income between $417 and $1,307 is taxed at 66%. Anything above $1,307 is taxed at 45% on the whole amount, not just the excess.
Note what is missing. There is no $18,200 tax-free threshold. A child cannot use the low income tax offset against this income. The rules apply to interest, dividends, rent, distributions and capital gains, whether received directly or through a trust.
In practical terms, a portfolio in a child’s name generating more than about $1,300 a year is being taxed at the top marginal rate. At a 4% yield, that is a balance of roughly $33,000. Many family savings plans cross that line well before the child finishes primary school.
The exceptions worth knowing
Division 6AA carves out two categories, and both matter.
Excepted persons. Certain minors are outside the rules entirely, including those working full time and not in full-time education, and those with particular disabilities. A teenager who has left school and is working is generally taxed at ordinary adult rates.
Excepted income. Even for a child inside the rules, some income is taxed at ordinary adult rates rather than penalty rates. This includes what the child actually earns from employment, income from a deceased estate, income from property transferred as a result of someone’s death, and compensation for injury.
That second category is the one that shapes good planning, particularly for grandparents, and we come back to it below.
Option one: keep it in your own name
The simplest approach is to invest in your own name, mentally earmark it for the child, and hand it over when the time comes.
The income is taxed at your marginal rate, which is very likely lower than 45% or 66%. You retain complete control. There is no trust to establish and nothing to administer.
The catch arrives at the end. Transferring appreciated assets to the child is a disposal for capital gains tax purposes, assessed at market value, and after eighteen years of growth that bill can be substantial. The tax you saved along the way can be handed back in a single transaction.
This approach works best where the intended gift is cash rather than the assets themselves, where amounts are modest, or where you are comfortable simply giving money from your general wealth when the moment arrives rather than running a dedicated pool.
Option two: in the child’s name, or a bare trust
Where money genuinely belongs to the child, is used for the child’s benefit, and an adult simply operates the account as trustee, the income is the child’s and Division 6AA applies. This is often written as “A. Smith as trustee for B. Smith”.
The tax outcome is poor once income exceeds $1,307. The compensating advantage is that because the child is absolutely entitled to the assets from the outset, handing over control at 18 does not usually trigger a capital gains tax event. The asset was always theirs.
The ATO looks at substance rather than the name on the account. If a parent provides the funds, controls the account and uses the money for general household purposes, the income is likely to be assessed to the parent regardless of whose name appears.
This structure suits smaller amounts, where the income stays under the thresholds, and situations where avoiding a CGT event at the point of transfer matters more than the tax paid along the way.
Option three: investment bonds
Investment bonds, sometimes called insurance bonds, exist precisely for this problem and are the most commonly recommended structure for medium-term and long-term children’s investing.
The bond is a tax-paid structure. Earnings are taxed inside the bond at the company rate rather than in anyone’s hands, so nothing appears on your return each year and Division 6AA is not engaged at all. If the bond is held for ten years and contribution rules are followed, withdrawals are generally tax free in your hands.
Two features do the heavy lifting.
The contribution rule lets you add up to 125% of the previous year’s contribution each year without restarting the ten-year clock, which suits regular monthly investing. Exceed it and the clock resets, so the discipline matters.
The child advancement option lets you nominate the child as the beneficiary and set a vesting age, commonly somewhere between 10 and 25, at which ownership transfers automatically. That transfer is not a capital gains tax event, which solves the problem that sits underneath option one.
Bonds suit families on higher marginal rates who want a genuinely hands-off structure, who want to control when the child gets access, and who will not need the money in the first decade. The trade-offs are a fixed internal tax rate that is unattractive if your own rate is low, less investment flexibility than a broking account, fees that vary considerably between providers, and a tax cost for accessing funds inside ten years. Compare the underlying investment menu and fee structure carefully, because they differ a great deal.
Option four: a family trust
Discretionary trusts offer flexibility over who receives income and are often already in place for business owners.
What a trust does not do is solve the children’s tax problem. Distributions of ordinary trust income to minors are caught by Division 6AA in the same way, and the trustee is assessed at those penalty rates. The flexibility to stream income to a low-income adult beneficiary is genuine, but a trust set up specifically to benefit young children does not achieve what people often assume.
Trusts also carry establishment costs, annual accounting and tax return obligations, and ongoing compliance that rarely justifies itself for a modest children’s savings pool. Trust taxation is also an area receiving policy attention at the moment, so anyone using one should expect to review the arrangement rather than set and forget.
Where a family trust already exists for other reasons, using it is a reasonable question to ask your accountant. Establishing one purely to invest for children usually is not.
Option five: superannuation
Contributing to super for a child produces an exceptional long-run result on paper, because a small amount compounding in a low-tax environment for fifty years becomes a large amount.
It is also inaccessible until preservation age, which for a newborn is more than six decades away. For almost every family, money intended to help with education, a first car, a house deposit or a start in life should not be locked in super. The exception is a deliberate multi-generational wealth strategy where the funds are genuinely surplus, and that is a conversation to have with an adviser rather than a default.
Education savings plans
Scholarship and education savings plans offer specific tax benefits where withdrawals fund education expenses.
They can work, but the sector varies widely on cost and flexibility, and the tax benefit is often smaller than the marketing suggests once fees are accounted for. Read the fee schedule closely, understand exactly what qualifies as an education expense, and check what happens if the child does not pursue the education path you had in mind. Compare the net outcome against a plain investment bond before committing.
For grandparents, the picture is different
Grandparents usually bring three things parents do not: larger amounts, a shorter personal time horizon, and an estate that will eventually be distributed anyway. That changes the analysis.
Testamentary trusts are the standout structure. This is the most important planning point in this article for anyone with substantial assets and grandchildren.
Income that a minor receives from a testamentary trust, meaning a trust established under a will, is excepted trust income and is taxed at ordinary adult marginal rates, with the full tax-free threshold available. The 66% and 45% penalty rates do not apply.
The difference is dramatic. A grandchild receiving investment income through a properly drafted testamentary trust can receive a meaningful amount each year effectively tax free, where the same income from a gift made during your lifetime would be taxed at 45%. Across several grandchildren and several years, the difference runs well into six figures on substantial estates.
The concession was narrowed some years ago so that it applies to income generated from assets of the deceased estate rather than from assets injected into the trust from elsewhere, so the drafting matters and this is work for an estate planning lawyer.
Gifting during your lifetime has other consequences. If you receive or expect to receive the Age Pension, gifts above the allowable limits are treated as deprived assets and continue to count under the assets and income tests for five years. Large gifts to grandchildren can reduce your own pension entitlement, which is worth modelling before you make them.
Control is worth thinking about. Money given outright is gone, and its treatment in a future relationship breakdown or bankruptcy is outside your control. Structures that stage access, such as a bond with a later vesting age or a testamentary trust with conditions, address that without being heavy-handed.
The traps
The capital gains bill at handover. Assets held in your name and transferred to the child are disposed of at market value. Structures that avoid this, principally bonds with a child advancement option and genuine bare trusts, are worth their cost for exactly this reason.
They get it at 18. Where a child is absolutely entitled, they can demand the assets at 18 and spend them however they like. If handing a large sum to an eighteen-year-old concerns you, choose a structure with a later vesting age and decide that now.
Franking credits are less useful than they look. A portfolio of fully franked Australian shares in a child’s name is often proposed on the basis that franking credits will be refunded. Given the $416 threshold and the penalty rates above it, the arithmetic is far less attractive than the same strategy for a low-income adult.
Tax file number withholding. Accounts without a TFN can have tax withheld at the top rate on interest above the relevant threshold. Not fatal, since it is recoverable, but it creates a return obligation nobody wanted.
Fees against small balances. A $2,000 investment carrying $100 of annual fees is a 5% drag before anything else happens. For small regular amounts, cost is the dominant variable.
The capital gains rules are changing. From 1 July 2027 the 50% CGT discount is replaced for individuals, trusts and partnerships by cost base indexation with a 30% minimum tax rate. That floor is particularly relevant here, because it affects taxpayers whose marginal rate would otherwise be below 30%, which describes most young adults selling their first parcel of shares. Anyone modelling an eventual handover should read our article on the CGT changes before assuming the old arithmetic holds.
A practical way to choose
Start with the amount. Under a few thousand dollars, keep it simple and low cost, and do not build structure around a sum that will never trouble the tax thresholds.
Then the horizon. Under ten years favours simplicity. Beyond ten years opens up investment bonds and makes their ten-year rule an advantage rather than a constraint.
Then your own tax rate. The higher it is, the more a tax-paid structure earns its keep. If your marginal rate is below the bond’s internal rate, investing in your own name may be better despite the eventual capital gains event.
Then control. Decide the age at which you want the child to have access, and choose a structure that delivers that outcome rather than hoping for it.
Finally, if the money is coming from grandparents and the estate is substantial, get estate planning advice before making lifetime gifts. The testamentary trust route is frequently better than anything achievable while you are alive, and it cannot be retrofitted afterwards.
Whatever you choose, the investments inside the structure still matter. A long horizon is the single greatest advantage a child’s portfolio has, and it argues for growth assets and low costs rather than the conservative default many parents drift toward. That is a question of asset allocation, and it is worth getting right alongside the structure.
Getting it right from the start
Structural decisions in this area are far easier to make than to unwind. A bond started with the wrong vesting age, or twenty years of accumulated gains sitting in the wrong name, both create problems that no investment selection can fix later.
If you are setting money aside for children or grandchildren and want to be confident the structure fits the purpose, our financial planning team can work through it with you, and coordinate with your accountant or estate planning lawyer where a trust is involved.
Frequently asked questions
How is a child’s investment income taxed in Australia?
Under Division 6AA, a minor’s unearned income above $416 attracts penalty rates. Income between $417 and $1,307 is taxed at 66%, and income above $1,307 is taxed at 45% on the whole amount. There is no tax-free threshold beyond the $416, and the low income tax offset cannot be applied to this income. The rules cover interest, dividends, rent, trust distributions and capital gains.
Can I just put shares in my child’s name?
You can, but once the income exceeds $1,307 a year it is taxed at 45%, which for many families arrives at a portfolio of around $33,000. The offsetting advantage is that where the child is absolutely entitled to the assets, transferring control at 18 does not usually trigger a capital gains tax event. It suits small amounts better than large ones.
What is the best structure for investing for a child?
There is no single answer, but for medium to long horizons and parents on higher marginal rates, investment bonds are the most commonly used structure, because earnings are taxed inside the bond rather than in anyone’s hands, the penalty rates do not apply, and the child advancement option transfers ownership at a nominated age without a capital gains tax event. For small amounts, simplicity and low fees matter more than structure.
Do family trusts help with investing for children?
Not in the way people often assume. Distributions of trust income to minors are caught by the same penalty rates, so a trust established specifically to benefit young children does not solve the tax problem. Trusts also carry establishment and annual compliance costs. Where a trust already exists for other reasons, it is worth discussing with your accountant.
What is the best way for grandparents to invest for grandchildren?
For substantial amounts, a testamentary trust established under a will is frequently the most effective structure, because income a minor receives from one is excepted trust income taxed at ordinary adult marginal rates with the full tax-free threshold, rather than at the penalty rates. It cannot be created after death, so it requires estate planning advice while you are able to give instructions. Lifetime gifting may also affect Age Pension entitlements under the deprivation rules.
Will my child have to pay capital gains tax when I transfer the investments?
It depends on the structure. Assets held in your name and transferred to a child are disposed of at market value, which can produce a significant capital gains tax bill after years of growth. Where the child was absolutely entitled from the outset, or where an investment bond’s child advancement option is used, the transfer generally does not trigger a capital gains tax event.
Should I put money into super for my child?
Rarely. The long-run compounding looks compelling, but the money is inaccessible until preservation age, which for a young child is more than sixty years away. Funds intended for education, a first home or a start in life should be held somewhere accessible. Super for a child is a deliberate multi-generational strategy, not a general savings approach.
General advice warning. This article contains general information only and does not take into account your objectives, financial situation or needs. It is not tax advice or legal advice, and trust and estate structures require advice from a qualified tax adviser and an estate planning lawyer. Tax thresholds and rules change, and the treatment of any structure depends on your specific circumstances. You should seek personal financial, taxation and legal advice before acting on any of it.
