Investment bonds have become the financial tool of choice for parents seeking to give their children a fiscal leg up, says national financial services firm KeyInvest.

KeyInvest National Business Development Manager Andrew Meinel said changes announced in the Federal Budget had boosted the appeal of investment bonds among parents and grandparents.

 “While measures in the Federal Budget clamped down on some income splitting strategies, there are still attractive opportunities to invest on behalf of children,” Mr Meinel said.

 “It’s just a matter of knowing where to look.

“We’ve noticed quite a rise in demand for our investment bonds since the Budget was handed down. This is mainly coming from parents and grandparents who are seeking a flexible, controlled and tax effective way to support their children’s future.”

Previously children could receive $3,333 of unearned income from their parents and pay no tax. Amaximum $1500 low income tax offset benefit was paid up to $30,000 income, with a reduced benefit paid until income reached $67,501.

Now children will only be able to receive up to $416 of unearned income without paying tax. Above $416, tax is paid up to 66%.

 Mr Meinel said a KeyInvest Life Events investment bond allowed people to invest in a child’s name (if the child is aged 10 or over) and pay no personal tax.

“The Life Events Bond can be held in the name of a parent, grandparent or child, without impacting that person’s personal tax if the money remains in the Bond for at least 10 years,” he said.

 “Tax is instead paid within the bond to create a simple option that caps the maximum tax rate at 30%. After allowing for dividend imputation credits and other tax deductions, the effective rate can be much lower.”

A child aged 10 or older can be the owner of a bond, but they will gain full control to decide how to spend the money once they reach age 16.

 “The preferred option may be to hold the bond in the name of a parent or grandparent,” he said.

“This avoids penalty tax rates for children under age 18 (if they make withdrawals in the first 10 years) and the adult stays in control. It also allows a bond to commence for a child under age 10.”

 One common use of an investment bond, such as the Life Events Bond, is to pay for a child’s future education.

“Education is a key life event that is becoming more expensive every year,” he said.

“More parents are purchasing our Life Events Bonds to save for the future education of their children who at the time are still yet to start reception at school.

“Something as little as $1000 can get you started and regular small contributions to this initial amount can build your investment into a surprisingly large savings account.

“However, proceeds from a bond can be used for any purpose, not just education funding.

“If the Child Advancement Option is selected, ownership can transfer to the child without triggering capital gains tax, at a nominated “vesting age” between 10 and 25.

“In this way, if the money is not fully used for education, the child can use the balance to help pay for expenses such as a wedding, home deposit or holiday – or even start saving for their own children.”

 Mr Meinel said that bonds can also be used as an effective way of encouraging children to save at an early age.

“Parents can use a bond as a quasi co-contribution savings plan by encouraging a child to put some of their own pocket money into the fund and then match the amount.

“This can be via a structured savings plan with a minimum contribution of $100 per month, or a minimum $500 annual once-off payment.”

This newsletter is provided for general information only. Please do not rely on this newsletter as a substitute for specific legal or financial advice. Before making any decisions you should consider your specific objectives, financial situation and needs. To obtain the relevant Product Disclosure Statement or any other offer document from KeyInvest Ltd (ASFL No. 240667) please call 1300 658 904