Insurance Bonds are the next best sheltered tax vehicle to super and can deliver personal tax arbitrage benefits for higher taxed investors. They also open a multitude of financial planning strategies and solutions.
Ross Higgins from AUSTOCK Life is seeing more clients and their advisers using Imputation Bonds in ‘strategy-based’ and/or ‘alternative structuring’ applications that work beside or in instead of superannuation.
While there is a considerable “after-tax” performance trade-off favouring superannuation’s low-taxed environment, there are many restrictions
Insurance Bonds do not have superannuation’s restrictions, such as:
- • Preservation Age restrictions: Bond owners do not have to wait until age 55 to 60 to make withdrawals from their Bond;
- • Contribution caps limits: Imputation Bonds do not have set limits when setting up a bond nor are there age-based/work-test restrictions; or
- • Generally prohibitions that apply to using superannuation as loan security or in gearing strategies do not apply to Bonds.
Contribution Limits Strategy
For investors who are unable to contribute to superannuation, or perhaps face contribution caps, Imputation Bonds can represent a valuable alternative and flexible, tax-effective investment structure.
For example, investors in this situation could invest in an Imputation Bond over, say, their last five or 10 working years. Then during their pre-age 65 retirement period they could make structured draw-downs against their Bond, while leaving their superannuation intact.
By doing this, any deferred tax assessability on the Bond’s pre 10-year growth can be structured over a succession of the early years of retirement, where they might be able to best utilise its imputed tax benefits in the form of 30 per cent tax offset claims.
Better still, if they hold the Bond beyond 10 years, then any draw-downs in their hands would be free of any personal income tax or CGT.
Redundancies and Golden Handshakes
One of superannuation’s lost advantages has been the ending of the former long-standing benefits of rolling over employment termination payment (ETP) monies into superannuation. These are now treated as taxable outside superannuation as ordinary investment monies.
These changes have opened scope to use Insurance Bonds as a type of post “roll-over” vehicle. For instance, someone receiving a redundancy in early or mid-working life may be advantaged by investing their ETP monies into an Imputation Bond, and then, over a period, drip feed these into the superannuation system.
Funds Exiting Superannuation Pensions
Monies coming out of the superannuation system via annuities and pensions often cannot be re-contributed back into superannuation. Investors aged 65 to 74 must satisfy the work- test, and generally those over age 75 cannot make voluntary superannuation contributions.
These “exited” monies often can accumulate in bank accounts and might cause annual income tax problems, or perhaps even have an unfavourable impact on qualification thresholds for, say, the Commonwealth Seniors Health Card.
For many higher tax investors, Insurance Bonds are the next best comprehensive tax/product structure after superannuation, and can represent an attractive repository investment vehicle for exiting superannuation pension mode monies. Additionally, Insurance Bonds have flexible estate planning advantages as against superannuation.
Overcoming Superannuation’s Estate Planning Limitations
Superannuation is favoured by a low 15 per cent ongoing fund tax. However, as against an Imputation Bond, it can suffer an additional 16.5 per cent exit tax if “death” distributions are made to non-dependants which typically are non-dependent adult children.
By contrast, Imputation Bond distributions due to death are simply tax-free to all recipients regardless of who they are or the state of their age or dependency.
| Bonds: Alternative (and complementary strategies) to superannuation include:
§ Creating tax-effective “annuity-like” withdrawal streams § New tax management strategies for family, discretionary & testamentary trusts § Tax-effective “in specie” transfers from family wealth structures § New dimensions to estate planning and Wills (for fixing family feuds and catering for blended families) § Achieving confidential, targeted and protected bequests, including for philanthropic purposes § Achieving inheritances and intergenerational wealth transfers for children and grandchildren § Alternative to “off-the-shelf” testamentary trusts § Aged care and Centrelink strategies § Foreign Investor tax advantages (including for SIV applications) |
