Investing for children is a great way to budget, build wealth and educate your kids.

Raising children is expensive. The average Australian family spends $537,000 bringing up two children to the age of 21 almost a quarter or the family income. And private school fees can add another $200,000 to that figure.

A regular investment programme for your children starting as early as possible can help you save for specific outgoings such as education and in meeting your overall financial needs. It also allows you to benefit from the wonder of compound interest.

Educating your children about the importance of budgeting and saving at a young age will encourage positive investment actions into their future.

The investment options for minors vary in terms of risk, accessibility and tax treatment:

•         Insurance and investment bonds offer capital growth and attract internal tax rates at 30 per cent when held in a parents name.

•         Managed funds offer a variety of investment options and increased returns but potentially involve more volatility.

•         Term deposits offer more security but capital can be less accessible and returns are usually low.

•         Savings accounts some banks offer special rates of interest but may restrict access and penalise withdrawals (such as reducing the interest rate rewarded for that month).

•         Education trust funds or scholarship plans linking your savings to a specific goal can make them less accessible. Its a safe alternative, generally in defensive assets, but with little scope for high growth. Conditions or penalties may be imposed if a child leaves school early.

Managed funds often require substantial initial investment, so one alternative is to pay small amounts into a high- interest bank account before moving the capital into a managed fund when enough has been accumulated.

If your child is lucky enough to receive a one-off gift or inheritance, the taxation implications can be significant.

Minimising the penalty

Investments made in a childs name may be subject to high levels of tax.

If the childs taxable income is less than $60,000, they are eligible for the low income tax offset, with income up to $2,667 effectively tax-free. Any interest earned above this amount will incur a penalty rate if the child is held to be the owner of the investment.

When determining an investments ownership, the Australian Taxation Office considers not only the name the investment is held in, but also who effectively controls the investment, whose money purchased the investment and for what purposes the funds are being used.

If the parent is deemed to be the owner, they pay tax at the marginal rate. Capital gains tax may also be payable when the asset is disposed of or ownership is transferred to the child.

Education, education, education

The biggest hurdle many young people face in managing their personal finances is confidence.

Of course, youll never stop young people living for today its part of growing up. But the earlier you start involving them in financial affairs, the easier it will be for them to start managing their own finances, developing budgeting skills and avoiding pitfalls such as high levels of personal debt.

The government is doing its part improve financial awareness at an early age with Your Money Starter Insurance and Super, a financial literacy resource for secondary schools recently rolled out as part of its wider Financial Literacy in Schools campaign.

The resources are geared toward children of all ages, from kinder to Year10, and include classroom materials, multimedia and activities. They are designed to build knowledge, and understanding, competence, enterprise and responsibility, leading to sound financial decision-making skills in adult life.

If youd like to know more about the risks and tax implications of investing for your children, contact our office and well be pleased to help.