Investing on behalf of your kids and the tax implications

Educating your children about money and the value thereof is vital in moulding them to be financially sound and functioning adults in the future. While teaching them about finances, one of the biggest lessons should be on the value of saving. This can and should be done practically too, as investing in your children’s financial future will enable them to get a head start in life, whether it be in education or purchasing a car or home. With this, however, it is important to be aware of the tax implications of investing for your children.

The tax implications
“If you donate money to your children or transfer an investment to them, the income is taxed in your hands for as long as your children are still minors. This includes stepchildren and adopted children,” said Carla Rossouw, tax specialist at Allan Gray.

It must thus be included in your tax return. The inclusion, however, is not the donated amount itself but rather the income earned off of it.

“Every parent shall be required to include in his return any income received by or accrued to or in favour of any of that parent’s minor children either directly or indirectly from that parent” stated the SA Tax guide.

While parents and guardians are allowed an annual donations tax exemption of R100,000, Rossouw pointed out that they will be liable for donations tax at a rate of 20% of the donated amount, if they donate in excess of this amount. Donations tax must be paid within three months of making the donation.

“If a minor receives a donation or lump sum from a person other than a parent, then the tax situation is different,” highlighted Rossouw.

This means that should the minor’s income be of an amount that is sufficient enough to make them liable for tax, a return needs to be submitted on their behalf. Rossouw, however, went further in adding that in the case of the ‘sourced income’ not exceeding R23,800, a return would not be needed.

Should you fail to do so, the company that is responsible for paying the interest and returns will go ahead and do so on your behalf, deducting from the relevant tax and affording it to the South African Revenue Service (SARS).

“This means that even if a minor is not registered as a taxpayer, any applicable amounts will be deducted from the interest and dividends before the balance is paid out to the child,” stated Rossouw.

This all changes once your children turn 18 and reach legal age, as they now become responsible for their investments. This responsibility includes that of paying all taxes on any income returns, as they are now seen as an adult according to the South African law.

At this stage, parents lose all transactional rights over the investment. Should the parent, however, want to retain control of the account, they need to execute the transferring of the account into their name before the minor turns 18.

“Depending on the type of investment, parents can either transfer the money into their own names, or make a full withdrawal. However, both these options can incur capital gains tax,” added Rossouw.

The methods, however, differ and vary between investment agencies and managers.