The best way to invest on behalf of children

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As a strategy I have always said to my children - don't give your money to the banks, buy a stake in the banks. To this end we are looking to purchase bank shares for our grandchildren and use a dividend reinvestment scheme to keep their portfolio growing. Their ages are seven, three and one, so they do not have tax file numbers. Is it possible to buy shares via an online broker in their name without a TFN? If I understand correctly, if we don't nominate a TFN, the account would be charged at the top marginal tax on the dividend earnings despite the dividends being reinvested. Otherwise if we buy them in our name we pay tax on the dividends and any possible future capital gain? Based on the above questions, what is the best strategy to buy share parcels for our grandchildren to give them a head start in life? M.B.

You can get a TFN for a child of any age. The best approach is to apply online but the Tax Office requires at least two forms of ID for a child under 16, which makes it difficult if they only have birth certificates, unless you've already obtained passports for them. As you may know, even babies must travel on their own passport.

While there is no law against children owning shares, they cannot legally sign contracts and brokers rely on this law to require such accounts to be registered in the name of an adult as trustee for the child.

It's a grey area and the Tax Office contradicts the brokers' stance by accepting that a child can be a shareholder, in which case the child's TFN should be quoted. Or, if in the name of the parent as trustee, then the parent's TFN should be quoted, unless there is a formal trust with its own TFN. Parliament really should clarify the situation.

You'll find it easier to buy shares in your name as trustee for the child, which means quoting your TFN and declaring the income in your name until the children turn 18. You could try submitting the child's TFN instead of yours, but with current data matching processes, whereby companies report to the Tax Office each shareholder's TFN and dividend received, you may cause the Tax Office's computers to light up, even if the broker's system allows it, which I suspect it won't.

With the recent falls in share price, it might be a good time to buy CBA, although NAB is offering an even higher dividend yield. Remember that each dividend reinvested has its own cost base and is thus a separate capital gains tax calculation when sold. Also, file the dividend statements carefully, a spreadsheet alone is not sufficient to verify a cost base.

Recent talk that banks will disappear under the impact of new technology is, I suspect, exaggerated.

I'm a 45-year-old single male, earning $66,000 a year and my apartment is mortgage free and valued at $500,000. I have $140,000 in super and $140,000 in a high interest online account. What can I do to build wealth? Share or investment property, or super? J.J.

I suspect that, right now, both shares and property are over-valued to varying degrees and the best way to lose capital is to buy an asset at the peak of a boom. So if looking to invest in either, wait and watch for price corrections, remember the old rule of the bazaar, "buy low and sell high!"

Assuming you plan to grow old, you will definitely need income in retirement and so you should contribute as much as you can afford into super over the next 25 years.

The best investment, even for 45 year olds, is in yourself. Currently, you are earning what is roughly an average wage. Are there any qualifications or training courses that will permit access to a higher income, thus allowing a greater rate of saving?

My parents passed away a couple of years ago, and left my two daughters (ages six and eight) $10,000 each. After seeking advice from our accountant, I set their inheritance up as a type of trust account for each girl under my name, and invested the total sum in Argo's managed fund in September 2015, and also used the dividend reinvestment plan in hope they would have a good investment for themselves in 10 years. I did this because Argo seemed to have a good historical record and was well regarded as a good quality investment. The investment has done poorly to date however, relative to the ASX that has done very well. Any thoughts or suggestions? B.R.

Argo, established in 1946, reached a peak share price of around $8.50 in 2007, then fell to lows around $4.75 in 2008 and again in 2011. It climbed back to around $8.20 in 2015, about two years ago, but is currently around $7.80 although, since August 2015, you would have received 46c in franked dividends. That said, the stock has performed better over 10 years than the All Ordinaries Index, which has never regained its 2007 peak and is still some 16 per cent below.

Being a "listed investment company" or LIC, the company invests across around 100 different companies, so you get the advantages of diversification. On the other hand, when looking at a large portfolio, half the funds do better than the other half, so if you can correctly identify a stock that will perform in the top half, you should be able to do better than the average. Hopefully.

Working on the rule "buy low", BHP is currently priced relatively low in that it is trading some 20 per cent below its 30-year regression line, so why not switch half into that stock?

If you have a question for George Cochrane, send it to Personal Investment, PO Box 3001, Tamarama, NSW, 2026. Help lines: Financial Ombudsman, 1300 780 808; pensions, 13 23 00.

This story The best way to invest on behalf of children first appeared on The Sydney Morning Herald.