Investing For Your Kids in Australia

Let's talk about setting up your little rugrat for financial greatness without falling into the ATO's sneaky tax traps.

Forget fancy family trusts that cost more than a small car and require a legal team the size of a football squad. We're going lean, mean, and tax-efficient with something called an Informal Trust.

Kids, Cash, and Crushing It: Your Guide to a Genius Kids' Investment Portfolio

Let's face it, kids are expensive. Like, "siphon money out of your wallet while you sleep" expensive. But while they are busy burning a hole in your pocket today, they actually have a secret superpower: Time. Because they have decades of growth ahead of them and their own (eventual) adult tax-free thresholds, they are the ultimate "long-term investors." If we set things up correctly now, we can help them build a massive head start without the ATO taking a giant bite out of their future nest egg. It’s about us using the system to make sure they keep every cent possible."Hold up," I hear you say, "is this even legal?" Absolutely! And it's simpler than trying to explain why Paw Patrol isn't real.

The "Informal Trust": Not as Boring as it Sounds

Imagine this: You want to buy shares for your mini-me. You could just buy them in your own name, right? Wrong! That's a rookie mistake. When you eventually "gift" them to your now 18-year-old, the ATO will clap their hands, declare a "CGT Event!" and demand their pound of flesh. Nobody wants that.

Instead, we use an Informal Trust. This isn't some complex legal beast; it's simply how you title the account. Most brokers (like the ones we love, Betashares Direct, CMC Invest) let you open an account in your name, but designated "<Your Name> ATF <Child's Name>" (ATF = "As Trustee For").

It's like having a special hat that says "I'm holding this for my kid, don't look at me!" And the ATO generally respects the hat.

The Golden Rule: Get a TFN for Your Tiny Taxpayer

This is where many parents trip up. You could use your own TFN for the account. But then the ATO sees you earning the income, and guess who gets taxed at your potentially higher marginal rate? You do! And then, when it's time to hand over the goodies at 18, they might still hit you with CGT. Boo!

The genius move? Get your child their very own Tax File Number (TFN).

"But my kid is 3 and only understands 'Bluey'!" Doesn't matter. The ATO issues TFNs to any age. This tells the taxman, loud and clear, "This is the CHILD'S money, not mine, so leave my wallet alone!"

Why is this so powerful? Because when they turn 18, and you switch the account fully into their name, the ATO sees it as a change of legal ownership, not beneficial ownership. The kid was always the owner in spirit (and tax paperwork!), so NO CGT is triggered on the transfer. It's like magic!

The "No Income" Secret Weapon: Growth ETFs

"But Baldmoney," you interject, "I heard kids get slammed with penalty tax rates!"

Ah, my astute grasshopper, you are correct! If your little darling earns more than $416 in unearned income (like dividends) in a financial year, the tax rates go bonkers (we're talking 66% and 45%!). The ATO is trying to stop rich parents from stashing all their cash in their kids' names to dodge tax. Fair enough.

But we're smarter than that! We play the long game.

Instead of investing in dividend-heavy stocks or funds (like an Aussie bank or a high-yield ETF), we go for "growth-oriented" ETFs. Think global diversification, tech innovators, stuff that reinvests its profits back into the company rather than spitting out juicy dividends every quarter.

Some ETFs for this strategy are:

• VGS (Vanguard MSCI Index International Shares ETF): Broad global exposure, generally lower dividend yield.
• IVV (iShares S&P 500 ETF): Exposure to the 500 largest US companies, again, often growth-focused with less emphasis on dividends.

These ETFs aim for capital appreciation (the share price going up!) rather than chunky income. This means your child's portfolio can grow like a weed, stay under that $416 dividend limit, and completely bypass those brutal penalty tax rates. Win-win-win!

How to Snag That TFN for Your Offspring (It's Easier Than Potty Training)

Right, let's get down to brass tacks. You're convinced. You want that TFN. How do you get it without losing your mind?

1. Hit the ATO Website: Head to the ATO's "Apply for a TFN" page.
2. Fill Out the Online Form: You'll complete an online form where you input your child's details. Don't worry, it's pretty straightforward.
3. Print the Summary: Once done, the website will give you an Application Summary with a barcode and a reference number. PRINT THIS OUT. Seriously, don't forget this bit.
4. The Australia Post Adventure: This is the slightly less "online" part. You (the parent/guardian) and your child will need to visit a participating Australia Post outlet within 30 days.
   • What to bring:
     • Your printed Application Summary.
     • Your child's original birth certificate (not a copy!) and/or passport.
     • Your own ID: Driver's Licence or passport.
     • Your Medicare card is super handy too, as it often links you both.
   • The post office staff will quickly verify the documents, snap a quick photo (of the docs, not your bewildered child), and send the details off to the ATO.
5. Wait for the Mail: In a few weeks (usually 10-28 days), your child's official TFN will arrive in the mail. Guard it with your life!

The Baldmoney Bottom Line

Setting up an Informal Trust, getting your child their own TFN, and investing in low-income, growth-focused ETFs (like VGS or IVV) is hands down the most tax-efficient and simplest way to build a significant investment portfolio for your kids in Australia.

You're side-stepping CGT, dodging penalty tax rates, and setting them up for a financial future where they might actually be able to afford a house (gasp!). Now, if you'll excuse me, I need to go explain to my own child how back in my day we only had four TV channels and if you missed it there was no 'watch again'. The struggle is real, but at least their portfolio won't be!