Why you shouldn't buy shares for your minor child

When a child is born, it can be very tempting to set them up on the road to financial wisdom and stability, after all we only desire the best for our offspring. Before doing so, it is worthwhile noting that there is a wealth of complications when issuing shares to a minor, whether in listed or unlisted companies.

While there are no legal reasons why shares cannot be registered in the name of a minor, there are more than enough tax reasons to make you think twice.

There are two categories of ownership to consider for an owner of a share: The legal owner, who is the registered owner and, in this scenario, has their name recorded in the share registry, and the beneficial owner, who benefits from holding the shares. Children cannot legally own the property; however, they are entitled to the benefits and thus they can be deemed the beneficial owner.

Minors do not have legal capacity in the eyes of the law. They are unable to enter into binding contracts or shareholder agreements which brings to light issues when a minor is the registered owner of a company’s shares. The Corporations Act 2001 (Cth) stipulates that prior to becoming a shareholder and entering into a contract, the shareholder must provide their consent, something minors cannot do as they are legally incapacitated. Consequently, they cannot contractually sell shares, nor can they vote or give a proxy vote at meetings. For their contracts to be legally binding, they need be formally declared once the minor reaches 18 years of age otherwise it remains unenforceable.

You might ask the question, “Are there better ways to invest shares for a child without the child actually doing so?”

What is better than the gift of life? Perhaps, making use of the giver of life themselves? Parents or guardians can hold shares for the minors as a trustee. Bare trusts and testamentary trusts (which arise out of wills) are an excellent alternative as they allow for greater flexibility and enable multiple children to be dealt with separately. In these cases, the trust deed seeks to define that the shares are held non-beneficially. When a capital gains tax event is triggered, the income is distributable to other family members, whereas if the trust did not exist, the minor would be taxed at higher penalty rates. To everyone’s satisfaction, the shares can be transferred into the name of the child without any CGT consequences once the child turns 18.

 

Written By: Yvonne Wu