Opening a savings account for your child feels like the responsible thing to do. But in Australia, certain common approaches to children's savings can result in tax rates that most adults never personally face — some as high as 66%. Here is what every parent needs to understand before moving money into a child's name.
Trap 1: The High-Interest Account Is Actually a High-Tax Account
When unearned income — interest, dividends, or investment income — is received by a minor (under 18), the ATO applies a special penalty tax regime. The effective tax rate on unearned income exceeding $416 per year escalates sharply:
Minor Unearned Income Tax Rates
First $416: 0% — tax-free
$417 – $1,307: 66% — yes, two-thirds
Over $1,307: 45% — adult top rate applies
Note: With current savings rates at 4.5–5%+, a balance of just $9,000–$10,000 can push unearned income past the threshold.
Many parents are shocked to discover that a children's savings account — set up with the best intentions — ends up delivering a 66% tax rate on the interest earned. This is not a planning failure; it is simply the ATO's system working as designed. The solution is to choose the right savings vehicle from the start.
Trap 2: Holding Shares in Your Own Name for Your Child — the CGT Time Bomb
A common approach is for parents to buy shares or ETFs in their own name, intending to give them to a child at age 18. This feels neat and practical. But when you eventually transfer those assets to your adult child, the ATO treats that transfer as a disposal — triggering Capital Gains Tax (CGT) on any accumulated growth, taxed at your marginal rate.
Why "I Will Transfer It Later" Creates a Costly Problem
You hold $50,000 worth of shares for 15 years. They grow to $120,000.
When you transfer them to your now-adult child, you trigger a CGT event on $70,000 of gain.
At a 45% marginal rate (minus the 50% CGT discount if held 12+ months), you owe tax on $35,000 — approximately $16,000 out of pocket.
If you planned to never formally transfer ownership, the CGT problem is deferred but not eliminated — it falls on your estate instead.
Trap 3: No TFN Filed — the Bank Withholds at the Top Rate
If a child's savings account does not have a Tax File Number (TFN) registered, and the interest earned exceeds $420 per year, the bank is required by law to withhold tax at the top rate of 47%. The withheld amount can eventually be reclaimed through a tax return — but your money is locked up with the ATO for the entire financial year, earning nothing.
Fix: Apply for your child's TFN (they can have one from birth) and register it with every financial institution that holds money in their name.
So What Are the Better Options?
Three Smarter Alternatives
Investment Bonds: Earnings taxed internally at 30% (lower than high-income parent rates). After 10 years, all proceeds are tax-free. Ideal for parents in the 37–45% tax bracket who are committed to a long-term plan.
Informal Trust Account (Parent as A/C Child): Uses the format "Parent Name <A/C Child Name>". With proper documentation showing the funds genuinely belong to the child, future transfers may be CGT-exempt. Requires careful record-keeping from day one.
Offset Account Strategy: Place funds designated for a child inside your mortgage offset account. The "return" is your mortgage interest rate (currently 6%+), which is after-tax and risk-free. Simplest option with no tax complexity.
Each option has trade-offs around control, liquidity and tax efficiency. The right choice depends on your income, time horizon, and how committed you are to the funds genuinely becoming the child's. A 15-minute consultation can help you identify which structure suits your family.
General information only
This article provides general tax information only and does not constitute personal tax, legal, or financial advice. Tax rules can change and individual circumstances vary.
If you would like advice based on your situation, please get in touch with the practice.
Contact the practice