As parents we are always on the lookout for successful ways of securing the future for our children, this can be either through opening investment vehicles or savings accounts on their behalf. We do this so that they can have a head start in life be it for educational investments, purchasing accommodation or a car etc.
Now, the mind-boggling question is, who will be liable for the tax, or will Sars forfeit the tax because it’s in the name of the minor (under the age of 18 years)? In this article, we go through the fine print about tax and ownership rights.
Whilst we at Global & Local are not registered tax practitioners or provide any advice on tax matters, we do gather information about tax matters all the time.
If you are opening an investment or donating money to your children, the income is taxed in your hands while your child is a minor. Income is the interest and dividend that is generated in the investment. When you are submitting your tax return, you do not include the amount that you have donated but you do disclose the income that is generated from the donation. If this is the only source of their income, the minor will not be required to register for income tax purposes. Suppose you do sell the investment at a capital gain; this amount must also be included in your capital gains tax. The sad reality is that these capital gains triggered from your child’s investment will affect your capital gains annual exemption of R40 000.
As the parent, you also need to be aware that you will be liable for donation tax (at a rate of 20%) if your donations have exceeded more than the stipulated amount of R100 000. This exemption of R100 000 is per person per year and not per donation. The tax needs to be paid within three months of making the donation.
Let’s assume a minor receives a gift or a donation from any person other than their parents, the minor will be liable for tax on income that is generated from the invested funds. Suppose a grandparent decides to donate an amount above R100 000, the grandparent will be liable for donation tax.
In addition, if the taxable income is sufficient to make them liable for tax, the minor must be registered for income tax and the parent must submit a tax return on their behalf. On the other hand, if the minor does not have any tax deductions to claim and the interest generated from the investment does not exceed more than R23 800 then a return is not required to be submitted.
When your minor turns 18, they become the legal owner of the investments you opened on their behalf as deemed by law. This automatically means, the parent loses the rights on their children’s investments once they turn 18. Sadly, most parents are not aware of this. This is a very important aspect to consider when planning your children’s investments.
Assuming that you would like to retain your right to your children’s investments, before they turn 18, depending on the investment type, you can either do a full withdrawal or transfer the investment into your name. The downside of this is that capital gain /loss tax will be triggered. If you decide not to withdraw or close the investment, upon turning 18 years your child will need to give consent in writing for you to have access to the investment. On the contrary, if your child is happy to manage the investment without your guidance there is no action required. However, they will be liable for the income and capital gains accumulated on the investment you have made on their behalf.
There are several investment vehicles that a parent can invest for their children, but the common ones are endowments and tax-free saving accounts. An important element of an endowment is that the sum assured is a guaranteed payment that can be paid out upon your death or when the minor has turned 18 years old. Another benefit is that there is life protection and savings under a single investment.
On the other hand, a tax-free savings account is an effective way to save for your children’s goals because any interest, dividends or capital gains from the investment will be free of tax. Another benefit of a tax-free savings account is that no tax is payable on withdrawals. However, the total contribution in a given tax year may not exceed R36 000.
There is an old adage that says, “Make hay while the sun shines”. Whilst we are still able and willing, let’s invest for the future of our kids. Nevertheless, it is very important to know the above factors when opening an investment for your child and the resulting tax implications. Happy investing everybody!
If our comments hereon relate to a situation in which our readers require further information, then we would advise that these readers obtain advice from a registered tax practitioner.