Minors can’t personally buy and sell shares, so to avoid the need for a formal trust the most common (and easiest) approach is to create an account in the name of an adult (e.g. parent) with the shares held in trust for the child. Transferring Ownership to the Child
When the minor turn 18, you can transfer ownership of all shares to the child and they will legally own the shares in their name. You relinquish all rights to the portfolio and lose control over the trading.
A “Change of Ownership” form is required and under most circumstances the adult will not incur capital gains tax because there was no change in beneficiary.
If the shares are Issuer Sponsored, you must use a form provided by the Share Registry. If the shares are held on HIN, you must use a form provided by your stockbroker. See this post for an explanation of SRN and HIN.
Shares to Buy for Kids
Most “gift” portfolios are relatively small (i.e. under $20,000) so building a diversified portfolio of individual stocks is not practical. Although it can be done, purchasing enough companies to get adequate diversification would incur significant brokerage costs (crippling the return of the small portfolio) and increase the time spent managing the portfolio.
A popular option to solve the diversification dilemma is to use an Exchange Traded Fund (ETF) that provides exposure to a broad market index (e.g. S&P/ASX 200). Investors can buy and sell ETFs through their stockbroker just like ordinary ASX shares and view prices online at anytime using their ticker codes.
Three of the biggest companies in Australia that offer Listed Funds are:
• SPDR
• Vanguard Investments
• BetaShares
Market Index has a page that lists all ASX listed ETFs grouped by region and sector. Tax Implications
A tax return will need to be completed for the child if they have earned more than $416 or are entitled to a refund of franking credits. The laws are complex and different for a minor (to prevent parents funnelling their income to children and avoiding their tax obligations) so an accountant should be consulted. This is especially the case when the adult wishes to purchase a large parcel of shares for the child as any profits above the $416 threshold will attract a high tax rate.
It's also extremely important that the adult does not use the portfolio or dividends for their own purposes in any way. The Australian Taxation Office (ATO) may see "cross-usage" as proof that the adult is actually the beneficial owner.
