Could there be a better way to teach a child about share investing than the child actually doing it? In Australia, it is entirely possible for children to “own” shares – there are however a few things to consider which are covered in this post.
Can a Child Own Shares?
To answer this question a very brief knowledge of property / trust law helps.
At law, property (meaning shares or other assets etc) can have two owners, simultaneously. One person can be the legal owner of the property whilst another the beneficial owner. The difference?
Legal owner – The person who is registered as the owner of the property. In the case of share ownership, the legal owner is recorded in the company’s share registry.
Beneficial owner – The person who ‘benefits’ from the property. That means any dividends paid are the property of the beneficial holder and if the shares are sold, the proceeds of sale would also flow to the beneficiary. The beneficial owner, whilst not registered as the legal holder, receives the economic impact (good and bad) of the property.
The legal and beneficial holder can of course be the same person, and they often are. If an adult purchases shares for their own benefit, they would be both the legal and beneficial holder.
In Australia, minors (under 18 years) are not able to own property. The word ‘own’ in this context refers to being the legal owner, a child can however receive the benefit from property that an adult owns for them; they can be a beneficial owner.
Can a child own shares? Yes and no! Essentially an adult must ‘hold’ shares for a child until they are 18, but because the child receives the economic impact from the shares, it could certainly be said that they ‘own’ the shares.
Isn’t this a Trust?
Yes. I have just described a trust relationship. That is when a person (trustee) holds assets for the benefit of another (beneficiary). A trust is formed when the legal and beneficial title are separated.
Self Managed Super Funds and Family Trusts are two common types of trust relationships you might have come across. These trusts take a prescribed form.
The basic legal principles hold though, a legal owner (trustee) holds property for beneficiaries. In these cases, there is a document (the trust deed) which seeks to define in some detail the rights and obligations that exist between the trustee and beneficiaries.
When an adult holds shares for a child, a trust exists, but it is a ‘bare trust’ – there most often isn’t and doesn’t need to be a written trust deed or similar, the very act itself of separating the legal and beneficial rights has the effect of creating a trust relationship.
To be clear, another way that a child can be the beneficiary of a shareholding is by way of a formal discretionary trust (family trust). This arrangement is outside the scope of this post and is a topic unto itself, instead I am discussing the bare trustee structure only.
How to Buy Shares for a Child
There are two common ways to purposefully buy shares; on market via a stockbroker, or through a public offer made by a company such as in the case of an Initial Public Offering (IPO).
Purchase on Market
To buy shares on the Australian Stock Exchange, you first need to establish an account with a stock broker.
An account may only be opened by a person 18 years or older. An adult can however establish an account and ‘earmark’ it as being for the benefit of a child.
To do this, follow the account opening process and when prompted, provide an account designation. The account designation is simply the way in which the account is identified as being for the benefit of a person other than the account holder.
Depending on the account opening process which various from broker to broker, you might be specifically asked if the account is for the benefit of a child, or you might be provided with the option to open a trust account.
If it is the later, you would need to indicate that the trust relationship is informal, as this will in turn indicate to the broker that no trust deed exists and the account holder will be holding shares as bare trustee.
The account will be named according to the convention of displaying the account designation between greater than and less than signs, with “A/C” following. This is the standard syntax in Australia. Example.
<Child’s’ Name A/C>
The child’s Tax File Number (TFN) should be provided a part of the account opening (more below). Additionally the child’s bank account should be provided for dividends to be deposited into. After all, they are the economic beneficiaries of the share ownership.
Purchase Through IPO
The application to subscribe for shares in the offer is completed using:
- The adults name as the shareholder.
- The child’s name as the account designation.
- The child’s TFN.
Paying for Children’s Shares
Paying for the shares can be achieved through whatever mechanism is available – cheque, B-Pay, EFT etc. If an adult pays for the shares, it would ordinarily be assumed that a gift of monies was made to the child as at the time of purchase.
If the child has their own savings, they might pay for the shares themselves.
Gifting Shares to a Child
An alternate way for a child to acquire shares is by gift. An adult can purchase shares and then gift them to the child.
This would usually be accomplished by an Off Market Transfer, and the price of the transfer would be the market price on the day the gift is made. For tax purposes, this would amount to a disposal of the shares for the adult as they are no longer the beneficial owner of the shares.
Tax Treatment of Shares Held by a Child
The ATO have a good summary of this on their website here (opens in new tab).
Who is the Beneficial Holder?
If you have a read of the ATO information you will see that they seek to clarify who actual beneficial shareholder is. This is achieved with three tests, as described here (extracted from the ATO website):
Whoever rightfully owns and controls the shares declares the dividends and any net capital loss or gain from the sale of shares. You need to consider who:
- provides the money for the shares
- makes share decisions.
- spends the dividend income.
The intent behind these tests is to establish who the beneficial shareholder actually is, with reference to actual, real life conduct. For the purposes of this post, it is assumed that the child is the true beneficiary. This would mean they receive the dividend income (if any), they participate in decisions (if age appropriate) and they pay for the shares.
On the third point in the prior paragraph, it is entirely possible that an adult, including the person acting as the legal holder (bare trustee) gifts the money to the child to acquire the shares – they would still be the child’s shares (in equity).
Tax File Number
Assuming the child is the beneficial shareholder, they need to account for any tax consequences of the share ownership. This may make it necessarily then that the child has a tax file number (TFN), and if required, file a tax return. There is no minimum age that a child needs to be to have a TFN.
You will need to file a tax return on behalf of the child if they make more than $416 income in a financial year, either from dividends and/or capital gains from selling shares. Income under this threshold does not need to be declared, but you can self elect to lodge a return, say to claim a refund from franking credits.
Children’s Income Tax Rate
The taxable treatment of children’s income depends of how the income is made. Income made from a child’s’ own labour is usually taxed just as it would be for an adult, however investment income is subject to much higher penalty rates.
I expect the ATO have these rules to discourage people putting income making assets in the name of children and taking advantage of the tax free threshold and bottom end tax scale rates.
Because of this, it makes sense for children to buy and hold investments for the long term, as selling a share at a profit could quite easily trigger a gain which result in a very high tax rate.
What Happens When the Child Turns 18?
The shares can simply be transferred to the child’s own name by completing an off-market transfer.
Given there has been no change in the beneficial ownership of the shares, this transfer would not have any taxation implications.
What Shares Should Children Buy?
Children are most often small investors due to the obvious fact that they generally do not have much money!
A cornerstone of investment strategy is diversification – spreading money across several assets to reduce volatility of returns (risk). The mathematics of diversification are such that an investor receives much of the benefit offered by owning shares in about 30 different companies.
If we consider that the minimum purchase of ASX listed shares is $500 in value, and brokerage costs often have a minimum charge per transaction of ~$20, it’s impractical to construct a direct share portfolio using only a few thousand dollars.
Exchange Traded Funds
An ETF is a type of investment vehicle which can help get around this problem. An ETF is a type of pooled investment where investors lump their money together to take advantage of scale advantages which come with larger portfolios.
A simple example of an ETF is SPDR® S&P®/ASX 200 Fund (opens new tab). This fund, which trades under the ticker STW has a very simple investment objective:
SPDR S&P/ASX 200, seeks to closely match, before fees and expenses, the returns of the S&P/ASX 200 Index
The manager of the fund takes a modest 0.19% fee per annum to manage the portfolio which consists of 200 of Australia’s largest ASX listed companies.
Instead of buying individual shares, an investor buys units in the fund, thus getting exposure to the underlying shares with a single transaction (with one lot of brokerage).
Units in a ETFs are bought and sold just like shares, so an account with a stockbroker needs to be established to make an investment.
Children Selling Shares
If shares (or units in an ETF) are bought through an established account with a stock broker (as explained above), the shares can be sold by simply instructing the broker to do so. At this point the money would normally flow into the child’s bank account.
If the shares were purchased through an IPO or gifted to the child, they can also be sold through a stockbroker. In these cases, the holding is likely to be issuer sponsored, which also provides the opportunity to sell the shares using a once off share sale service such as Sell My Shares – which is a faster and simpler alternative.