Investing for your children is a generous act of foresight and certainly opens up future opportunities for them. However, you need to be aware of the tax implications of investing money on behalf of your children.
This is the view of Carla Rossouw, tax specialist at Allan Gray, who says that when investing money in the names of your children under the age of 18, the income and capital gains from those investments must be included on your own tax return.
“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,” says Rossouw.
She explains that it is not the donated amount itself, or the value of the unit trust investment, that must be included in your income, but rather the income resulting from the donation, that is, the dividends and interest.
“If you later cash in the unit trust at a capital gain, this amount must also be included in your capital gains tax calculation.”
While parents and guardians are allowed an annual donations tax exemption of R100 000, Rossouw says 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.
“Minors are liable for the tax on any income generated from money they inherit or receive as a gift from anyone other than their parents, including grandparents. This means that the minor is liable for any tax on interest, dividends and capital gains, if applicable” she says.
Rossouw explains that if your minor children’s taxable income is sufficient to make them liable for tax, you must register them for income tax and submit a return on their behalf. However, a return is not required if your minor child does not have any tax deductions to claim and their gross income consists solely of South African-sourced income not exceeding R23 800.
In the case of withholding tax on interest and dividends, the company that actually pays the interest or dividends will deduct the relevant tax and pay 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.
“However, once your children turn 18, they are legally responsible for their investments. When this happens, parents need to be aware that they lose transactional rights over any investments made in the name of their offspring.”
Rossouw says that the only way parents can retain rights to investments made in the name of their children is to act before their 18th birthday.
“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.”
She says that administrative practices vary between investment managers. At Allan Gray, if children want a parent to continue managing the investment on their behalf, they will have to give written authorisation to the investment manager, giving a parent permission to act on their behalf.
“It is also important to note that, as a parent, you won’t be liable to pay tax on any income and capital gains tax on investments made in the name of your children once they turn 18. At 18 they are an adult in the eyes of South African law and their taxes become their own responsibility, meaning they will need to complete their own tax returns,” concludes Rossouw.