Investment Bonds have been in operation for years, and importantly have been subject to very little legislative change when compared to other investment choices.
Investment Bonds are an investment that pays its own tax at the company tax rate. This means the maximum tax rate is 30%, but it can be lower if there are franking credits associated with the investment allocation. There is no impact on your personal taxation.
Importantly once held for ten years any money you redeem from this investment is tax free. There are some other circumstances where the Bonds are redeemed tax free such as death and financial hardship.
Investment Bonds can therefore be a very tax effective way of investing. They are relevant in a number of circumstances:
- You want to invest for your children - but want to avoid the punitive tax scales for minors.
- You are a high income earner.
- You want to retire earlier than the Superannuation laws allow.
- You have maximised your salary sacrifice contributions.
-You have maximised your non concessional contributions cap.
- You are concerned about exceeding the $3m superannuation balance limit.
- Your income is close to $250,000 which would trigger an additional 15% superannuation tax.
There more to Investment Bonds than just taxation. They are also a very effective estate planning tool. Investment Bonds have the ability to nominate a beneficiary. Importantly the nomination does not require probate and is paid directly to the nominee. This means the funds can get to where they are needed quickly.
The bonds also have the feature to allow for a future event. So you can set a date for the transfer of assets, and set the condition - ie a lump sum or an income stream. Importantly you can change the beneficiary (except for Bonds setup specifically for children) at any time.
One of the key features for estate planning is the transfer does not reset to 10 years period, so the tax advantages are transferred.
Investment Bonds also have an important part to play in an Asset Protection strategy. They offer protection from creditors in the event of bankruptcy (subject to the in intention of the investment not being specifically to hide assets).
Investment Bonds in Practice*
Scenario
When Steve married his second wife Sarah, he was concerned with making sure his ten year old daughter Kate, from his first marriage, got a good start in life. His daughter is living with Steve’s former wife, while Steve and Sarah have two young children. Objective The couple use mutual wills to provide for each other and for their children from both marriages. But Steve is not sure if this arrangement will reflect his concerns about providing for Kate and is concerned that his will may be challenged.
Solution
Steve sets up a LifeBuilder investment bond. • He nominates under the EstatePlanner Future Event Transfer facility for his investment to be transferred to Kate on his death. • Steve instructs under the facility that Kate’s access to the funds be restricted until she reaches her 21st birthday.
Benefit
Using the LifeBuilder Future Event Transfer facility ensures Kate’s nomination is fulfilled privately and outside of the estate. It also avoids the complications of including Kate in a will and potentially a complex testamentary trust. The LifeBuilder is treated as a non-estate asset, placing his nomination of Kate outside of the estate processes, subject to probate requirements and the potential delays associated with probate.
Scenario
Anna is 55 years old and is on the highest marginal tax rate of 47%.5 She currently earns and expects to earn $200,000 plus super guarantee (SG) contributions of $22,000 each year. She salary sacrifices $5,500 each year into her superannuation to maximise her concessional cap of $27,500 p.a.6 Anna’s superannuation balance is $1.95m and is therefore unable to make nonconcessional contributions into her account as her balance is in excess of $1.9m.
Objective
Anna wants to maximise her retirement contributions and is able to contribute a further $15,000 each year but is not able to make further Superannuation contributions.
Solution
Anna has capped out the maximum she is able to contribute under the concessional contribution limits. • She uses a LifeBuilder to contribute an equivalent after tax amount of $15,000 in the first year of investment. • Anna increases her annual contribution in the second and subsequent years by 10% each year.
Benefit
By age 65, Anna will have contributed $55,000 in concessional contributions (through salary sacrificing) into her superannuation (the maximum permitted in her case). She will also have contributed an additional $239,061 into a tax-effective LifeBuilder where earnings are taxed at a maximum rate of up to 30% compared to her marginal tax rate of 47%.7 Anna is also able to access her LifeBuilder benefits prior to her intended retirement age if she needs to. Furthermore, she will have peace of mind knowing that if the rules to accessing superannuation change, she will still have access to funds through the LifeBuilder investment. Anna does not need to worry about any personal tax liability on earnings and growth, or paying tax at her own higher personal marginal tax rate, while the funds are invested. After 10 years, any withdrawals she makes are paid with no further personal tax liability provided she invests within the 125% Opportunity rules. She is also able to use her investment bond as security against a loan and make her investment work even harder for her. With her LifeBuilder, Anna has the added comfort of knowing any future death benefit paid can be received tax-free by whomever she nominates as a beneficiary – whether paid directly from her investment (for a LifeBuilder beneficiary), or indirectly via her estate (for a will beneficiary).
Scenario
Sarah is 82 years old and has a total superannuation balance of $2.5m. She has an adult daughter, Emily, who owns a small business.
Objective
Sarah wants her estate to go to her adult daughter upon her death. Sarah is concerned that Emily’s business has recently experienced financial hardship. She is looking to safeguard her daughter’s inheritance from any future creditors.
Solution
Sarah withdraws her superannuation tax-free (being over the age of 60). • She establishes a LifeBuilder investment bond to the value of $2.5m. • Sarah sets up a Future Event Transfer facility event where her LifeBuilder ownership will transfer taxfree to her daughter on her death. Benefit Sarah can automatically transfer ownership of the investment bond to her daughter tax-free upon her death. Emily’s ownership of the LifeBuilder investment bond is not affected by any future potential creditors as she did not make an investment for the purpose of avoiding creditors. This protection from future creditors applies to the LifeBuilder itself as well as any proceeds from the LifeBuilder (e.g. withdrawal proceeds) made on or after the date of any future bankruptcy. Sarah is comforted that her legacy to her daughter will not be jeopardised.
For more professional retirement planning advice, call 02 9634 6698 or book a free consultation online with our expert financial advisors at our office in Sydney's Norwest.
*These scenario's were taken from clkkenp120ijb0po7pebo1ltg-generation-life-strategy-booklet-2023-07-27.pdf (azureedge.net).
**Please note that this article is for information purposes only and does not constitute advice, and you should not act on this information without consulting a financial planner and/or a registered tax agent.
***This blog was written using data from third part websites, over time the material may become out of date. We do not accept any liability should you act on this material with receiving individual advice that considers your personal needs and current legislation.
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