In the recent Federal Budget, the government targeted discretionary trusts, moving to tax them at a minimum 30 per cent.
Combine that with another potential 30 per cent tax for distributions to corporate beneficiaries following the outcome of the recent Bendel case in the High Court, and these structures are looking less and less attractive.
For income earners in higher tax brackets with investment options more limited, what to do?
The standout for me is the humble, and often overlooked, investment bond. From the get-go it’s important to remember that because investment bonds are generally taxed internally at a maximum rate of 30 per cent, these work best for income earners in the top two marginal tax brackets. As of July 1, these tax brackets are now 47 per cent and 39 per cent respectively (including the Medicare levy).
Investment bonds are a blend between a managed fund and a life insurance policy. The bond owner holds the bond, can be life insured and can also nominate beneficiaries.
You can start with investing any amount in the first year, and from the second year onwards you can contribute a maximum of 125 per cent of that initial amount.
The earnings are taxed internally at a maximum of 30 per cent and often less because of franking credits generated from investments in Australian shares. There are no income distributions to declare in your tax return, and if you hold the investment for 10 years or more, you can withdraw tax free.
Investment bonds can play a useful role in investment and estate planning strategies.
For example, if you are in your 40s and considering an early retirement in your 50s, investment bonds can provide a transitional income stream given the inability to access superannuation before turning 60.
If you have children, there are several potential applications. As a parent you can buy special child bonds and nominate vesting ages, meaning the bond transfers to them at the chosen age.
Given the increasing financial challenges and burdens the children of today face, they could use the future investment capital to fund a higher education debt or make buying their first home more affordable.
With estate planning, the bonds can provide more flexibility when it comes to beneficiaries, especially for blended families with complex relationships. In the case of superannuation, death benefit nominations are generally restricted to a spouse or children. With bonds, you can nominate any person, charity, company or trust as a beneficiary and, like a super death benefit, the bond provider must pay it out as directed when the person insured on the bond dies.
The nominations cannot be challenged, and the providers of the bonds are also subject to greater oversight by the Australian Prudential Regulation Authority (APRA).
You don’t have to go all in on investment bonds, but they could be a good fit to help diversify the structuring of your financial planning.
As the last couple of months have shown, it’s prudent to have different investment strategies for when Government changes the rules on us.
Brendan Bate (ASIC No. 1272327) and HLB Wealth Pty Ltd (ASIC No. 428645) are Authorised Representatives of Paragem Pty Ltd (“Paragem”), ABN 16 108 571 875, AFSL No. 297276.
Disclaimer: The information contained in this article has been provided as general advice only. The contents have been prepared without taking account of your personal objectives, financial situation or needs. Before you make any decision regarding any information, strategies or products mentioned in this article, you should consult your financial adviser to consider whether that is appropriate having regard to your personal objectives, financial situation and needs. Please note that any audit, taxation and accounting services are provided by HLB Mann Judd and are not within the authority of Paragem’s AFSL No. 297276.