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Hi Warren , I have a question on investing in my minor child's name . If I was to invest 100,000 Rand in my daughter's name and there was interest to be paid on that investment , from an interest tax point of view , would it be my annual interest tax exemption of 23,800 ? Would that apply to my investments as well as hers ?
Or would there be a separate annual interest tax exemption in her name for her investment before I would start to pay tax on the interest from her investment ?
So that's the one , and then , similarly for things like dividend withholding tax , capital gains tax , would there be a threshold or an exemption in my miner's name because the investment is in their account , or would it be all of my thresholds and my limits that would apply to my investments as well as hers ?
As a follow-up , if there were no exemptions that my miner would qualify for , in other words , if I was liable for all the tax on her investment in her name , are there any other ways besides starting this as a tax-free savings account that any other means I could use to pay as little tax as possible on my miner's investment account ?
Welcome to Honest Money . We're doing Q&A again and we've had a fantastic voice note , which I really like , and I think it's a very good question . I'm just listening to the mom talking about this and I realized she really knows what she's talking about , so much so that I couldn't just answer this question .
I had to call on my team to help me do some research . So what I am going to say before I give you my answer is just remember that this is a podcast for information . Please don't take this as gospel . I pay someone to do my taxes , so don't trust my tax advice as the last word . But I think I've got an idea of what's going to happen here .
So just to break that question down , so if you're a parent and you're investing a reasonable amount of money in this case 100,000 Rand on behalf of your child , and you're doing that for the purpose of avoiding tax which is , you know , I mean tax avoidance is legal . Tax evasion is illegal , you know .
So avoiding taxes is entirely your right and you should be as tax efficient as possible , but SARS is not a dummy right ? So SARS has figured this thing out .
So what happens is if your child is , let's say , four years old and you're putting 100,000 Rand into an investment in your child's name , sars isn't going to then look at the child and tax the child separately unless you've registered your child for tax and the child becomes a taxpayer in his or her own right right .
What's going to happen is actually that SARS is going to tax you as the parent until your child turns 18 and then becomes a legal adult and then your child becomes a separate taxpayer . So unfortunately , you know , setting money aside in your child's name and hoping that that's going to avoid tax for you is not going to happen .
You know , and even if you did it as a legal donation , you know , just to remember here , parents are allowed to or anybody actually is allowed to donate up to 100,000 Rand a year to someone else without paying donations tax .
So donating , you know , money to your children every year makes a lot of sense if you've got a lot of money because you're reducing your estate and you're growing their investments and giving them a great head start in life . But just to understand that that does have some tax consequences for you , you're not going to avoid tax .
And equally , I know some parents will do this and set the money into their child's name , but with the pure intent of drawing that money for themselves later . So you put the money in your three-year-old's name now and in eight years' time you draw the money out and use it to buy a car for yourself .
Just understand that's actually going to be taxed as if it was your money . So there isn't a pure tax reason to do this . There's a good financial planning reason , but not a tax reason . I know in the second part of your voice note you obviously know that you can contribute to tax-free savings accounts for children .
So just to explain that , you are allowed as a parent to do R3,000 a month into a tax-free savings account in your child's name , but it's for your child , so it's not something that you can draw on . If you draw on it you're actually going to use up your child's lifetime capacity .
So just to explain , we're allowed to do 3,000 a month , which is 36,000 a year , up to a maximum of 500,000 Rand over our lifetime . So if you contribute and you build up your tax-free savings to 100,000 Rand in your child's name and then you draw it out , your child will not be able to then be able to top that 100,000 again later in life .
That 100,000 capacity is lost . So that means their lifetime capacity now will only be 400,000 . So that's really not a smart strategy for your child if you want them to be financially free one day . So rather , don't do a tax-free savings account in your child's name if you're planning to use the money .
However , if you are planning to kind of set your child up with a head start financially , then tax-free savings , I think , is the first and best option .
The second option is always to consider something like an endowment from a unit trust company or an index tracking company , because if you leave the money in an endowment for a period of five years , any money that you take out of that endowment after the five-year period will be tax-free in your hands .
So if you're the owner of the endowment , you start the endowment , you put a lump sum in there and you leave it for five years at least , then any money that you take out will be tax-free for you . Now , this is not a too good to be true story .
What's happening is , every year the endowment is paying income tax at a rate of 30% and capital gains tax at a rate of 12% . So SARS is still getting their money and so they're happy with endowments and equally because they've got one big taxpayer , being the insurance company , to monitor . They don't have to monitor thousands and thousands of individuals .
So this is not a scam that's going to fall over one day . This is a very old and established way of investing .
So if you want to invest in your child's name and you actually want your child to benefit from the money over a long period of time , there's nothing wrong with putting 100,000 in the endowment now and then leaving it for your child and when they're 25 or something , they've got a lot of money to put down on a house or to set up a big investment for their
future . So I think , just understanding that there are some options around this , but starting an investment just a generic exchange traded fund or unit trust investment in your child's name , you know , with an amount of $100,000 or anything , thinking that you're going to avoid tax ? Unfortunately not . You know , I was caught on to that one a long time ago .
Thanks so much for the great question . As I said , please get tax advice if you're going to kind of look at these options in more detail . You know , honest money is just an information session , it's not a financial planning session , and you know , good tax advice is always worth the money . Please keep the questions coming .
We love your voice notes , you know , even if it's not a voice note and just a message we appreciate those as well .
Thank you so much . 10x investments don't need dramatic instruments to seem impressive . They let the results sing for themselves . So 10X your future without the drama . 10x is a licensed FSP .