For a special christmas present

Published in the Herald Sun, December 2011 By Karina Barrymore 

If you're going to be spending money on gifts, why not make it something that can have a long-term benefit -and may even trigger a lifelong understanding or love of investing. 

It may sound a bit "high-flying" to buy shares, but investment experts say it's really a very down-to-earth financial move by parents that could help set their children up for life. 

However, there are a few tricks of the trade to make the most of the gift and ensure it doesn't cause any tax or ownership problems down the track. 

How to buy 

Anyone can buy shares. 

The cheapest and easiest way to do it, if you don't want advice, is to set up an online share account. 

Many major organisations offer this service and the cost of brokerage can be as little as $30. 

But if you want advice on the type of shares and the different ways to make your purchases, then a share broker or financial adviser is the first port of call. 

Under 18s 

According to Wealth Within fund manager and analyst Dale Gillham, if the children are under 18, then you will need to set up a brokerage account for them with either yourself or their legal guardian as trustee. 

The same goes for a bank account into which the dividend payments from the shares can be paid. 

Once they turn 18, these shares can then be transferred to their own account and name without someone as their trustee. 

Alternatively, you can buy and hold the shares in trust for the child. 

Over 18s 

If the person receiving the gift already owns shares, he or she will have an existing CHESS and "holder identification number", or HIN, from earlier share purchases. 

A CHESS number allows investors to buy shares through the Australian Securities Exchange Clearing House Electronic Sub register System. 

"All you need to do in this case is contact a broker and ask them to purchase the shares you want to give them, using their CHESS and HIN numbers, and the shares will automatically be bought in that person's name. 

"Alternatively, if they don't already own shares you will generally need to get them involved ahead of time." 

This means getting the person to set up a brokerage account, so they can register for a CHESS number. 

Once they have these identifying numbers, you can either purchase new shares for them or transfer existing shares you already own into their name, Mr Gillham says. 

"Using a share transfer form has no cost to it such as brokerage. 

However, depending on the price you paid and the price (at which) you transfer the shares to the other person, there may be some capital gain."  

The taxman 

"Children under 18 cannot own shares directly but they can be the beneficial owner. 

It is quite common to buy the shares in the parent's name in trust for the child," according to tax expert Adrian Raftery, founder of Mr Taxman. 

"Where the parents act as trustee, any dividends are counted as taxable income to the child. 

So the parents should apply for a tax file number for the child and provide that to the share registry. 

"I encourage parents to prepare a tax return each year on behalf of their child and receive the imputation credits back as a refund. 

"Alternatively, if the shares are simply held in the parent's name, and not in trust, then the dividend income is added to the parent's income and taxed at their rate," he says. 

New tax laws set a limit of $416 a year on investment income for anyone under 18. 

Any dividends or investment income over this amount are taxed at a penalty rate. 

"So parents will need to be careful to monitor investments as they grow," Mr Raftery says. 

Which shares? 

In most cases, as the initial purchase is likely to be relatively small, this can create a few problems when deciding what to buy. 

According to financial adviser Glenn Fairbairn from Hewison Private Wealth, buying shares in just one company is not necessarily the best strategy. 

"This carries a certain level of risk as the long-term performance of your child's savings is solely reliant on one company," he says. 

"We prefer to use listed investment companies. 

These companies are listed on the ASX and invest in a diversified portfolio of shares across different sectors and industries. 

"This provides the opportunity to invest in a professionally managed share portfolio with as little as $500," Mr Fairbairn says. 

Mr Gillham says that if you are choosing individual shares, stick with quality. 

"In the end, I believe it's wise to go for the safe choices such as the top 20 or top 50 shares in our market," he says. 

"Anyone buying shares as a gift would have the intention of having the receiver profit from the gift and these stocks have a history of delivering good returns."