Helping Children Financially

One of the most common questions I am asked by clients, and others, is how I can best help my child or grandchild financially, without giving them a lump of cash which they might fritter away.

It’s a tough question. Many of the obvious answers such as buying shares or putting money into a bank account, just create tax problems either for you or the child you’re helping and raise questions as to when they should be able to access the funds.

I usually suggest something completely different.

If the child you are hoping to help is working, they will have a superannuation account and if they are earning less than $60,000 a year you should be taking advantage of the Federal Government’s co-contribution scheme.

Under this scheme, a relative of a low-income earner can contribute $1,000 of after-tax money to the child’s super fund, and they complete their annual tax return, the Federal Government will match it by contributing up to $500.

It’s a great scheme. There’s no paperwork to complete and only three simple steps.  Earn less than $60,000, contribute up to $1,000 with after tax money and then for the owner of the super account to lodge their annual tax return.

This strategy can then be turbo charged by the Federal Government’s First Home Super Saver scheme.

The contributions made to super under the Co-Contribution scheme can sit there in the child or grandchild’s super account, steadily earning a return on the investment and any tax is automatically paid. When the child becomes a young adult, they can withdraw up to $50,000 and use it as a deposit on their first home.

Under this strategy the child, or a person on their behalf, can contribute up to $15,000 a year, including the co-contribution strategy, as a non-concessional contribution to an overall maximum of $45,000.

This strategy is dependent on making the most of superannuation. There are a raft of rules and regulations you need to be mindful of to make sure you don’t breach any superannuation contributions caps but for many parents and grandparents, it ticks all the boxes.

It’s a way of helping their child financially, typically starting with small amounts but potentially increasing to larger amounts, without giving them a big chunk of money all at once. While any contributions will attract a 15 per cent tax applied to all earnings and capital gains within super, there is no contribution tax on non-concessional contributions.

The funds will be proactively invested alongside the other funds in the account, ensuring your contribution is put to work right from the get-go and will be available to your child or grandchild when they take the important step of buying a home. Sweet.