#Everyone Needs A Plan To Pay For Their Child's Education

Most people would like to put some savings aside for their child, whether it be for paying for their education, buying them their first car, or helping them with the deposit for their first home.  However, depending on how you save those monies, the tax man could be taking more than their fair share!

Here are 3 things you need to know when saving for your child's education

1. The primary issue for saving for children is the "minors income tax rates" levied on a child's unearned income.

• The ATO deems unearned income to a child (i.e. Not income received from work), such as interest on bank accounts, or returns from a managed fund, share dividends and share capital gains, et cetera.

• If any investment, such as a bank account, is held in the child's name, or if the parents are trustees for the child, any income earned (interest or capital gains) on the investment is taxed at the minors income tax rate. 

• In addition, a child is not eligible for the low income earners tax offset, therefore they are paying tax on every unearned income dollar exceeding $416 for the financial year.

• The table below details the rate of tax charged depending on the unearned income received by a child per financial tax year.

2. Some parents will establish a scholarship (education) bond for their child, however these investments may also have also tax implications not necessarily made clear to the parents.

• Income earned on the fund is generally taxed at 30% (and paid by the fund). However, if the funds are used to pay for the child's education, this tax is effectively reversed, but is taxed at the minors tax rate if the child is under 18 years of age.

• These types of scholarship funds and education bonds all have different structures and therefore the method of taxation of income may differ, depending on the fund. As such, the parent would need to ensure they fully understand exactly how income is earned and taxed within the fund and when the monies are withdrawn from the fund, before making a decision as to whether or not the fund will be suitable for their particular requirements.

3. If the parent saves the money for their child's education in an investment structure that is not in the child's name (e.g. in parents name), the minors tax rate is not payable rather any income is taxed at the parent's own marginal tax rate, which may lead to some planning opportunities.

• If only one parent is working, or one parent has a low income and therefore a low marginal tax rate, the savings account for the child's education could be put in the name of the parent that has the lowest tax rate therefore reducing the tax payable, or depending on the taxable income of the parent, eliminate the tax altogether.

• If the parents have a mortgage facility, they may consider depositing the savings for the child's education into their home loan, which will have the effect of earning the equivalent of the home loan interest rate tax-free (as interest saved, is not taxable), and redraw from their home loan to pay for the child's education when needed.

As with all financial planning matters, each person's circumstances are different, and therefore if you are considering a financial planning strategy for paying for your child's education (or any other capital objective for your child such as a car or a deposit on their first house), you would need to discuss your requirements with a qualified professional such as a financial planner or accountant, before making any decision.

If you would like to know more about how to best save for your child's education, please contact ustoday and arrange yourfree financial assessment appointmentbecause everyone needs a plan to pay for their child's education!