Family Wealth Planning

Why investing in your child’s name can result in tax of up to 66%

Building a financial head start for a child or grandchild is a wonderful goal. But the seemingly obvious approach, investing directly in their name, can create a surprisingly costly tax outcome.

Many families put money aside for school fees, a first car, university, travel, a first home deposit, or simply to give a child more choices later in life. Opening a bank or investment account in the child’s name can feel like the natural first step.

However, Australia’s tax rules for minors mean that passive investment income received by a child can be taxed at marginal rates of up to 66%. Understanding how these rules work before an account balance becomes substantial can make a material difference to the outcome.

Why are children taxed differently?

Australia has special tax rules for people under 18 who receive unearned income. This generally means income generated by investments rather than income earned from genuine employment or a business activity carried on by the child.

The rules exist to prevent adults from shifting investment income into their children’s names to access what would otherwise be a lower tax rate. While the policy objective is understandable, it can catch families who are simply trying to invest prudently for a child’s future.

Unearned income may include:

• Interest from a savings account or term deposit
• Dividends from shares
• Distributions from ETFs or managed funds
• Rental income
• Many distributions from a family trust

How the tax rates work

For the 2025–26 financial year, a child who is under 18 and is not an “excepted person” can generally receive up to $416 of relevant unearned income tax-free. Once income exceeds this very modest level, the tax treatment changes sharply.

The outcome can be even more counterintuitive once the child’s relevant investment income exceeds $1,307, because the 45% rate can apply to the entire relevant amount, rather than only the amount above that threshold.

Account control is not the same as ownership

A common misunderstanding is that having a parent listed as trustee, account operator, or signatory means the investment will automatically be taxed to the parent. That is not necessarily the case.

The crucial question is who is beneficially entitled to the investment and its income. If the money genuinely belongs to the child, and the child is entitled to the investment income, the special minor tax rules may still apply, even where a parent administers the account.

This also has an ownership consequence. If money has been genuinely gifted to a child, it may be the child’s asset, rather than an amount a parent can later redirect to another purpose.

Before investing, consider these two questions:

1. Is this intended to be an irrevocable gift to the child now?
2. If not, what is the most tax-effective and flexible way to invest for their future?

Options to consider

There is no single structure that is right for every family. The appropriate approach depends on the purpose of the money, the expected investment period, the parents’ respective marginal tax rates, existing debt, asset-protection considerations, and the degree of control the family wants to retain.

1. Invest in a parent’s name

In many cases, the simplest approach is for a parent to own the investment personally while earmarking it for the child’s future.

Investment income and capital gains are then taxed to the parent at their ordinary marginal tax rate, rather than under the punitive minor tax rules. The parent also retains flexibility over when and how the money is used.

This can be especially useful where money may be needed before the child reaches adulthood, including for school costs, sport, travel, a first car, or assistance with a home deposit.

The trade-off is that the parent pays tax on income and gains, and the investment does not legally belong to the child until it is gifted.

2. Use the parent with the lower marginal tax rate

Where appropriate, investing in the name of the parent with the lower marginal tax rate may reduce the family’s annual tax cost. This is often a practical option, particularly where the intended investment is for the child’s future but the parents want to maintain control.

Ownership should be genuine, and the decision should not be made on tax alone. Estate planning, asset protection, relationship circumstances, existing income levels and likely future income should all be considered.

3. Use a family trust or company

A family trust or company may be useful where there are broader objectives, including asset protection, estate planning, managing a family investment portfolio, or flexibility in allocating income among adult family members.

However, these structures are not a simple way to avoid the minor tax rules. A discretionary trust can generally distribute income to adult beneficiaries, but most distributions of passive investment income to children under 18 are still taxed under the higher minor tax rates.

A company pays tax in its own right and can retain profits for reinvestment. However, the tax consequences of extracting money later, including dividends, need to be considered carefully. A company also involves additional establishment, accounting and compliance costs.

Family trusts and companies should be used because they support broader commercial, family-wealth, asset-protection or succession objectives, not simply because of an expectation that they will make passive investment income tax-effective for young children.

4. Consider an investment bond

An investment bond, also known as an insurance bond or education bond, allows a parent or grandparent to invest for a child without the child personally receiving annual taxable investment income.

The bond provider pays tax on earnings within the bond, generally at a maximum rate of 30%. If the bond is held for 10 years and the contribution rules are followed, withdrawals can generally be made without further personal tax.

Investment bonds can appeal to higher-income families seeking a simple, long-term education or future-funding strategy, particularly where they would prefer not to receive annual taxable distributions from investments held personally.

They are not automatically the best option, however. Important considerations include:

• The 10-year holding period
• The 125% contribution rule, which can restart the 10-year period if it is exceeded
• Product and investment-management fees
• The available investment options
• The fact that personally held investments may be eligible for the 50% capital gains tax discount, whereas an investment bond does not receive that discount in the same way

Matching the structure to the goal

The key takeaway

Putting money into a child’s name can feel like the obvious way to save for them. Yet once investment income grows beyond a very modest level, the minor tax rules can make this approach surprisingly expensive.

The more useful question is often: Do we want the child to own this money now, or do we want to invest for their future while retaining flexibility and managing tax sensibly?

The answer can materially affect the investment structure that makes sense. Reviewing the ownership structure early can help families avoid unintended tax outcomes as balances and investment income grow.