To prevent parents from using investments in their child’s name to avoid investment tax, the SA Revenue Service (Sars) considers any investment by you in your child’s name as part of your taxable income.
According to Carla Rossouw, tax specialist at Allan Gray, when investing money in the name of a child who is younger than 18, the income and capital gains from those investments must be included on your own tax return.
“If you donate money to your children or transfer an investment to them, the income is taxed in your hands for as long as your children are still minors. This includes stepchildren and adopted children,” says Rossouw.
This means that when you complete your tax return, you have to include any dividends or interest that have been paid on investments in your child’s name. This also includes any capital gains tax when those investments, such as a unit trust, are sold. This makes a strong case for opening a tax-free savings account in your child’s name instead.
The good news, however, is that you only have to include the investment tax in your tax return if you made the donation. If for, example, a grandparent opened the investment, then that investment would only be taxable in the hands of the child.
Rossouw says, in this case, your child would only have to register for income tax if their taxable income from these investments is sufficient to make them liable to pay tax.
If your child does not have any tax deductions to claim and their gross income consists solely of South African-sourced income not exceeding R23 800, Rossouw says a tax return is not required.
In the case of dividend income, Rossouw explains that the company paying the dividend will pay the tax directly to Sars, which means that tax is already paid out before the balance is paid to the child.
Also keep in mind that while parents and guardians are allowed an annual donations tax exemption of R100 000, Rossouw says that they will be liable for donations tax at a rate of 20% of the donated amount if they donate in excess of this amount. Donations tax must be paid within three months of making the donation.
Once your child turns 18, they become liable for the tax on their investments.
“When this happens, parents need to be aware that they lose transactional rights over any investments made in the name of their offspring,” says Rossouw, who adds that the only way parents can retain rights to investments made in the name of their children is to act before their 18th birthday.
“Depending on the type of investment, parents can either transfer the money into their own names, or make a full withdrawal. However, both these options can incur capital gains tax.”