By Paul Rickard

In my previous article on this topic, we covered how minors (people aged under 18) are taxed, whether your child needs a TFN (tax file number) or not, who is liable for paying any tax and we also reviewed some of the bank deposit accounts especially designed for kids. 

Today, we will look at how to buy shares for minors.

Buying shares

I am a big fan of buying shares for minors – not because they might be the best performing investment (although often they are), but rather because I think the experience can be particularly educational and help foster a life-long interest in investing. All the evidence points to the share market being a fantastic creator of long term, tax effective wealth, so I am often dismayed when adults explain why they haven’t invested in shares. The biggest reasons:

I hear is a misplaced fear that investing in shares is like punting or gambling (which is fanned by an ignorant media), or I simply don’t know how to do it. Interestingly, you never seem to hear these “excuses” about property.

So, witnessing at first hand the power of share marketing investing at a young age is a great way to overcome these barriers. Without banging this soapbox too loudly, I could almost develop an argument that every parent (subject to financial resources) has an obligation to get their kids to start investing in shares!

Name recognition, that is choosing companies that your kids might associate with because they buy or use the companies’ products or services, is a big part of the story. The child’s bank, the supermarket where you shop, mobile phone provider etc., can be good companies to start with in a portfolio, so that when the child gets the company’s annual report and other correspondence, there will be a lot greater affinity with that company. And as a customer, they get to sample and evaluate first hand the offerings of the company they part own.

Opening a share account for a minor

Opening a share account for a minor is getting harder, mainly because the brokers have been required to tighten their customer identification procedures. Further, many brokers have automated account opening and identification systems, which just don’t allow an under 18 to operate.

While there is no law that specifically says that shares cannot be owned by minors, some companies have a clause in their constitution that prohibits the registration of shares to minors. So, the ASX through CHESS has adopted this convention and prohibits direct registration to minors.

This means that in the absence of a formal trust, you have to open the account with a broker in your name, and effectively designate your child/grandchild as the beneficiary by placing their name is the account designation field.

The account will be set up, and shares registered, as follows:

Frederick John Smith  Parent/grandparent

<Mary Jane Smith A/C> Child/grandchild

In law, you will be the legal owner, while the beneficial owner will be your child/grandchild. When your child turns 18, you should be able to complete an ‘off-market’ transfer that changes the ownership legally to your adult child. As there will be no change of beneficial ownership, there shouldn’t be any capital gains tax to pay.

Which shares to buy?

The starting point is to balance the size of the gift vs transaction costs (brokerage), and finding some shares that are going to be good long-term performers. And hopefully, picking some companies that your child or grandchild will be able to identify with.

The minimum order size that you can place on the ASX for an initial investment is $500. However, if you are paying brokerage of $14.95 or $29.95 – this represents transaction costs of 3.0% or 6.0% respectively – a pretty big chunk. So, I would suggest that you try to get the parcel size up to at least $1,000.

You also want to select stocks that come from a diverse set of industries/sectors, and names that should be around in many years’ time. It is hard enough thinking about the market in the short term – so thinking about the long term where there are going to be so many up and downs probably leads to the conclusion that you stick to the major blue chip companies.

If I was feeling particularly generous and planning to gift $5,000, I would select:

  • $1,000 of my child’s bank (eg. Commonwealth Bank)
  • $1,000 of the company where we buy our groceries (eg. Wesfarmers)
  • $1,000 of a mining or resources company (probably BHP or Woodside)
  • $1,000 of a telco or major online business that they may experience (Telstra or Seek)
  • $1,000 of a major health care company (probably CSL, Ramsay or even Medibank)

I make no claim that there is much “investment science” in the selection of this portfolio. However, there is some elementary diversification, they are companies my child should be able to identify with, I am confident that these companies are likely to be around in 10 years’ time and I have an expectation that they should be able to pay (in most cases) fully franked dividends.

CommSec’s Share Packs

Rather than do the hard work yourself, an alternative is to purchase a Share Pack from CommSec (some of you may remember these as the old ‘Aussie Shares’). CommSec share packs are available in amounts from $4,000 (minimum) to $25,000 (maximum). A very competitive fixed brokerage rate of $66 per share pack is charged for an online order.

CommSec offers 4 categories of share packs: Capital Growth, Income, Market Leaders and Tax Effective Income. Each pack comprises 6 equally weighted companies, selected by the CommSec Research team. This morning, a $5,000 Market Leaders share pack comprised the following stocks:

CommSec Market Leaders Share Pack

The Capital Growth pack was as follows:

These pre-mixed alternatives are easy to buy, cost effective and arguably, have a stronger element of diversification. While I can’t readily see how Sydney Airport qualifies under the “capital growth” label, let’s assume that there is some science in their construction. The downside with these packs is that the name recognition may not be as high.

Whether you use these pre-made packs from CommSec or do the hard work yourself and select one or more shares, in the long term, I am sure that your child or grandchild will (one day) appreciate any gift of shares – no matter how large or small. 

On Friday, we will focus on some of the special investment products – insurance bonds and education funds.