The main obstacle to avoid when investing as a minor (<18) is to avoid a Capital Gains Tax (CGT) event when turning 18.
Capital Gains Tax: the tax investors are required to pay when realising their gains (e.g. selling shares).
Disclaimer
This is NOT financial advice. I am a 15 year old child and can not give financial advice. If you lose money, that’s on you.
Calculating CGT1
| Type | CGT % |
|---|---|
| 18+ | Added to total income that year (top marginal rate: 45%) |
| <18 <$416/year | 0% |
| <18 $417-$1307 | 66% |
| <18 >$1307 | 45% |
According to the ATO, excepted income (i.e. taxed at the normal adult rate, not elevated child rate) includes
- Employment income
- Income from the investment of any of the amounts listed above.2
This means that if declared correctly any capital gains that are made from investments that come from money a child made themselves (casual work) are taxed at the normal adult rate, therefore 0% for under ~$18k. I do not know how to lodge a tax return for income like this, I would recommend speaking to an accountant or financial advisor.
There are a number of different ways to invest in a child’s name. The main thing to make sure of is the investments are made using the child’s TFN, meaning it can be claimed on the child’s tax return.
Note that while this CGT info is interesting, no brokerage/platform allows minors to make an account in their own name.
I invest using vanguard personal (vanguard.com.au), which is a platform that allows you to invest in managed funds. This does not use the child’s TFN, so any capital gains need to be lodged under the adult, and gets taxed at the adult’s top marginal rate. This is not the optimal investment strategy, and something I plan on changing.
ETF vs Managed Fund
To optimally choose alternatives, it will be helpful to understand the different forms of investing, particularly ETF vs Managed Fund investing. Vanguard has a detailed comparison here, but the main difference are:
- ETFs are bought on trading platforms that also buy traditional shares (Commsec, CMC Markets, Stake, etc).
- Managed funds are bought through platforms like Vanguard Personal (which I use)
| ETFs | Managed Funds | |
|---|---|---|
| Platform | Bought on brokers that also buy traditional shares (Commsec, CMC Markets, Stake, et | Bought through platforms like Vanguard Personal (which I use) |
| Fees | Investment management fee of 0.27% from Vanguard | Investment management fee of 0.29% from vanguard |
| Buy/sell cost | Buy/sell costs from brokerage (Commsec, CMC Invest) | N/A (for vanguard personal) |
| Min. Order | However much the cost of the ETF is (ASX:VDHG is ~$63) | No minimum order (can buy fractions of shares) |
I invest a flat 10% of my weekly payslip, which means that managed funds make a lot more sense, as I can buy fractions of shares. This means I don’t have to wait until I have enough funds to buy a single larger share.
The difference between smaller and larger amounts is optimising for either cost or convenience. Smaller accounts can get away with optimising for convenience as the cost is not large enough to matter too much. Larger accounts should optimise for cost.
The convenience/costs in question are:
- Cost: CGT event when transferring from adult account to child when they turn 18
- Convenience: Fractional buy/sell orders (very useful for investing a flat % weekly, which will be quite small for working minors)
Recommendation
From the research I have done, there isn’t really a reason to use vanguard personal, or any other platform that require a CGT event when transferring funds at 18. It makes more sense to use CMC Markets or similar, and savings that aren’t big enough to buy a full share sit in a High Yield Savings Account (HYSA) until there is enough money to buy a full share.
It seems like the best brokerage to open a minor trust account is CMC invest, due to low fees ($0 for the first <$1000 buy order per day, $11 flat sell)
Conclusion
I’m going to try CMC Markets, and see if it works for me. If you noticed anything factually wrong with the article, or have any suggestions, please email me on the email address in the website footer.