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Friday, 4 August 2006

For those with kids

Just thought I'd jot down some notes about what I've been doing regarding my son's finances. He's turned 6 and is already quite money-wise. He enjoys earning some money busking at the Art Gallery with his recorder, and used to do a local paper round [with a lot help from dad the taxi service/heavy lifter]. As all his basic living expenses are taken care of and $3 per week pocket money, he manages to save 100% of his earnings! At his age and net worth he'd definitely be classed as a PAW (nb. see the millionaire next door for a great read and to find out the difference between PAWs and UAWs)

There whole area of money and kids can be quite complex here in Oz - especially as there is such a low threshold for 'unearned income' (around $1400 pa) beyond which a massive marginal tax rate of around 66% applies!

A couple of good things that you might not be aware of
1. Gifts don't count, so little Johnny doesn't have to include pocket money, xmas money from Grandma etc. on his tax return (you HAVE applied for a tax file number of his behalf, haven't you?)
2. Beware of investing too much in stocks etc. on his behalf - if he gets more than $1400 in dividends etc. he'll pay a fortune in tax (it's to avoid you putting all your money in your kids names to minimise tax). Anyhow, these days superannuation is such a good deal that you'd be better socking spare money into your super than your kids investments. If he does invest in shares, select those that have a Bonus Share Plan (so they don't issue dividends) would be a good way to accumulate more shares without earning taxable income. There will be a larged capital gain when he eventually sells the shares though - the Bonus Shares have a zero cost base.
3. EARNED income is treated entirely differently to unearned income - normal adult tax rates apply, so, basically earning $5,000 a year on a paper round didn't make him liable for any tax. Also, any interest or dividends on EARNED income that has been invested is also taxed at the normal adult rates - so make sure you he has separate bank accounts, Chess share HIN etc. My son has one St George Happy Dragon account where he saves his pocket money etc., where the interest will be considered unearned income, and he also has a separate Online banking account which is ONLY used to receive his paper round wages by direct payment. Any interest on this account can be thus be included when calculated the earned income total for his tax return.
4. He has a so-called "child super" account used for retirement investing in his name. Superannuation is another way to invest that avoids any issues with high taxation - super is only taxed at 15%, even for kids. The Macquarie account he uses is invested in a 50/50 mix of International Equities and Geared Local Shares - which is quite risky (volatile) but should give high returns over his long,long investment horizon (54 years till retirement!).
5. He also has second PERSONAL RSA (retirement savings account) with AMP so he can make personal undeducted contributions into superannuation and be eligible for the annual government "co-contribution". For each annual personal undeducated superannuation contribution of $1000 he receives the $1500 as a government co-contribution! A pretty good immediate return of 150%!

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