What parents need to know before investing in shares for kids
Investing in shares for a child can be a great way to help them build long‑term wealth, but the tax rules that apply are very different from those applying to adults. The Australian Taxation Office has clear guidance on how ownership, control, tax file numbers and dividend income should be handled when shares are bought for or held on behalf of a minor. Understanding these rules upfront can help parents avoid unexpected tax bills and ensure income is declared correctly.
Who should quote the tax file number
When shares are purchased, a tax file number must be quoted to avoid high withholding tax. If the shares genuinely belong to the child, the child’s tax file number should be used, and children can apply for a tax file number at any age. If a parent is holding the shares informally on the child’s behalf and no trust deed exists, the parent may quote their own tax file number instead. If the shares are held within a formal trust structure, the trust’s tax file number is quoted. If no tax file number is provided, tax is withheld from unfranked dividends at the top marginal rate.
Who must declare the dividend income
Tax on children’s share investments depends on who truly owns and controls the shares. The person who is the genuine beneficial owner must declare the dividend income and any capital gain or loss if the shares are sold. To determine this, the ATO looks at who provided the money to buy the shares, who makes the investment decisions and who benefits from the dividends. If a parent or grandparent buys shares for a child but keeps the dividends for themselves, the adult is treated as the owner and must declare the income. If the money used belongs to the child and the dividends are saved or reinvested for their benefit, the child is considered the owner and the income belongs in the child’s tax return.
Special tax rules for minors
Children under 18 do not receive the normal adult tax‑free threshold on passive income such as dividends. Instead, minors are taxed under special rules designed to prevent adults from diverting investment income into a child’s name. Investment income up to a small threshold is tax‑free, but beyond that, punitive rates apply, with high tax applying to most unearned income above the threshold. This means that holding large share portfolios directly in a child’s name can result in unexpectedly high tax, even if the income amounts seem small.
How ownership affects tax treatment
Holding shares in a child’s name does not automatically make the child the owner for tax purposes. The ATO considers the true beneficial owner when deciding who should declare the income. For example, if an adult uses their own money to buy shares and uses the dividends for their own purposes, the adult is treated as the owner. If the shares were funded by the child’s own money, such as gifts or savings, and all income is reinvested or set aside for them, then the child is the beneficial owner. In that case, dividends belong in the child’s tax return, even if a parent’s name appears on the account as trustee.
Why share income is treated differently to bank interest
Income from children’s share investments is assessed differently from interest earned in children’s savings accounts. The rules for beneficial ownership are more closely scrutinised, and there is a greater focus on who provided the funds and who uses the income. Even if a parent buys shares “for the child,” the tax outcome depends on whether the child genuinely benefits from the investment.
What parents should consider
Before buying shares for a child, parents should think about who will be treated as the owner for tax purposes, how the dividends will be used, and which tax file number will be quoted. They should also consider whether a trust, investment bond or holding the investment in the parent’s name might achieve a simpler or more tax‑effective outcome. Ensuring records clearly show who benefits from the investment will help avoid disputes about ownership.
Setting up children’s investments correctly from the start can help minimise tax, avoid withholding issues and ensure the right person declares the income each year. To read a full breakdown of key rules and examples, visit our website.
