Investing for Kids in Australia: How It Actually Works

👪 Whose name does the investment go in?🔗

🎯 The essential: Children can't legally enter financial contracts, so the investment has to sit in an adult's name, either as a trustee for the child or in the adult's own name outright.

The most common setup is an informal trust, or minor trust account. You open a brokerage account in your own name, designated as trustee for the child (the account name typically looks something like “Jane Smith <Billy Smith>”). You control the account and make the investment decisions, but the child is the beneficial owner, and investment income is assessed in the child's hands for tax purposes. Most major Australian brokers offer this structure. When the child turns 18, the investments can typically transfer into their own name without triggering a capital gains tax event, because beneficial ownership never actually changed.

The alternative is simpler: just invest in your own name, with the intention of handing the money over later. There's no trust designation, no separate TFN requirement, and you keep full control, including the option not to hand it over at 18 if circumstances change. The trade-off is tax, every dollar of income and any eventual capital gain is assessed at your marginal rate, not the child's. And if you do eventually gift the shares, that's a capital gains tax event for you at that point.

For most families investing modest amounts regularly, the minor trust structure is the more common choice, since the child's penalty tax (below) only bites once the portfolio starts generating real income. For larger amounts, your own marginal rate might work out cheaper. It genuinely depends on your tax situation.

⚠️ The tax trap most parents don't see coming🔗

🎯 The essential: Neither structure is tax-free. It's a trade-off between the child's penalty rates and your own marginal rate.

The ATO applies deliberately punishing tax rates to children's unearned income (dividends, interest, trust distributions), specifically to stop parents sheltering large amounts of income in a child's name to dodge tax. The rates:

A few things worth knowing. The Low Income Tax Offset doesn't apply to a child's unearned income, so there's no offset softening the blow the way there is for an adult on a low income. The 45% rate genuinely applies to the whole amount once income passes $1,307, not just the excess. And franked dividends still bring their franking credits along, which can offset some of the liability.

It's worth being clear this only applies to unearned income. Money a child earns from actual work is “excepted income” and taxed at normal adult rates, including the tax-free threshold.

In practice, at a typical dividend yield of 3 to 4%, a portfolio doesn't generate enough income to hit the $416 threshold until it's worth somewhere around $10,000 to $14,000. For most families starting with $50 a month, that's years away, but it's worth knowing it's coming as the balance grows.

📈 How compounding plays out over a childhood🔗

Say you invest a $1,000 lump sum at birth, then add $50 a month into a diversified investment returning an average 7% a year.

This is exactly the mechanism covered in our article on what compound interest actually is and why time in the market matters more than the size of any single contribution.

✅ Practical steps to get started🔗

Once you've picked a structure, the setup is fairly mechanical.

1. Get your child a Tax File Number. You can apply through the ATO, either via myGov or a paper form. It's free, and avoids the broker withholding tax at the top rate on dividends.
2. Choose a broker that offers minor trust accounts. Not every broker does. Compare brokerage fees, minimum amounts, and whether holdings are CHESS-sponsored (registered directly on the ASX register) rather than just held by the broker.
3. Open the account in the correct trust format. The account name needs to be correctly designated as a minor trust, your broker will guide you through the exact format.
4. Choose your investments. A low-cost diversified ETF is a common starting point for a childhood-length time horizon, more about giving compounding time to work than picking winners.
5. Automate a regular contribution. Consistency matters more than timing. A $25 or $50 automatic transfer each month removes the decision entirely.

If you're new to investing yourself first, our step-by-step guide to starting to invest in Australia covers choosing a broker and buying your first ETF.

❓ Frequently asked questions🔗