A number of changes came into effect on 1 July 2017 that limit the amount of money those saving for retirement can put into super. This includes new limits on concessional (or before tax) and non-concessional (or after tax) contributions.

The limit on concessional contributions has been reduced from $35,000 to $25,000 per annum and the limit on non-concessional contributions has been reduced from $180,000 to $100,000 per annum.

Additionally, the threshold where an extra 15 per cent tax (total of 30 per cent) is paid on concessional contributions applies to anyone earning $250,000 or more of ‘income for surcharge purposes.’ This threshold was previously $300,000.

In light of these changes, high income earners (those earning $250,000 and above) may now feel compelled to consider alternative investment structures outside of the superannuation environment that offer similar tax-effective benefits. There are a number of options which may be useful in minimising or deferring tax, such as a family trust, or setting up a private company to hold investments, but for those on high incomes one of the more cost-effective, flexible, and tax-effective options may be an investment bond.

What is an investment bond?

Investment bonds (also known as insurance bonds or growth bonds) have features similar to a managed fund combined with an insurance policy and can be tax-effective for those on high incomes  providing certain rules are followed.

Most investment bonds offer investment options such as cash, fixed interest, shares, property, infrastructure, or a range of diversified investment options, with risk levels ranging from low risk to high risk. The value of the investment bond will rise or fall with the performance of the underlying investments.

A long-term investment strategy

An investment bond is designed to be held for at least 10 years and you can make additional contributions over the life of the insurance bond. To make the most of the tax benefits, each year you can contribute up to 125% of your previous year’s contribution.

Withdrawals

Money can be withdrawn from the investment bond at any time, however if you withdraw your money before the 10 years is up, some of the income may be taxable, depending on when the withdrawal is made. If no withdrawals are made in the first 10 years, any earnings on the bond will be tax-free.

10 year rule

Investment bonds are tax-paid investments. This means when earnings on the investment are received by the insurance company, they are taxed at the corporate tax rate (currently 30%) before being reinvested in the bond. This can make insurance bonds a tax-effective long term investment for those with a marginal tax rate higher than 30%.

If you hold the bond for at least 10 years the returns on the entire investment, including additional contributions made, will be tax-free subject to the 125% rule.  If you make a withdrawal within the first 10 years, the rate at which earnings in the investment bond are taxed will depend on when you make the withdrawal.

The 125% rule

Investors in investment bonds can make additional contributions each year. As long as the contribution does not exceed 125% of the previous year’s contribution, it will be considered part of the initial investment. This means each additional contribution does not need to be invested for the full 10 years to receive the full tax benefits.

If contributions are made to the investment bond that exceed 125% of the previous year’s investment, the start date of the 10 year period will reset to the start of the investment year in which the excess contributions are made. You will then have to wait a further 10 years from this date to gain the full tax benefits.  If you do not make a contribution to the investment bond in one year, any contributions in following years will reset the 10 year rule.

If you are approaching (or have reached) your superannuation contributions limits and would like to find more about investment bonds and whether one may be suitable for you, please contact us.

Source: Capstone. This article contains extracts from ASIC’s Moneysmart website.

Discover the benefits of a privately owned Licensee.

DOMINIC BENTLEY

CWP Wealth

“I have been with Capstone for over three years and have found them refreshing to deal with. They help you become the best version of your business. I can wholeheartedly commend Capstone to any planner.”

PAUL BRONSON

Bronson Financial Services

“At a time of industry upheaval, the support of Capstone has been a godsend. Everything they promised they delivered.If you are looking for a new licensee you cannot beat the Capstone service offering."

JASON DUDENAS

Canyon Financial Planning

“Capstone Financial Planning should be at the top of your list for a Licensee. Grant and his amazing team give a down to earth and personalised approach to supporting practices.”

MORGAN COLLINS

Lane Financial

“Capstone have some of the highest quality individuals in their team and it’s a pleasure to benefit from their insight and assistance. We really can’t recommend them enough to anyone considering a licensee.”

HELEN STEVENSON

Strategic Retirement Solutions

“I recommend Capstone to any adviser seeking to 'go out on their own'. They are a fabulous licensee!”

BOB CHEN

Everalls Wealth Management

“With Capstone I can operate my business free from conflict. They have no in-house products, a flexible APL, and an extensive list of SMA solutions. I recommend Capstone highly.”

JEANETTE SCHRAM

Nett Assets

“I can highly recommend Capstone for planners seeking an independent licensee that’s not in your face but provide quality support services. Their service and support is second to none and has allowed us to concentrate on providing our clients with a premium level of service.”

BEN DREW

Paradigm Principle

“Having been with Capstone for a number of years, one thing that really stands out is their willingness to help and can do attitude. These are qualities we really appreciate.”

JOEL BONES

IEC Advisory

“The team at Capstone are all genuinely really good people. They are remarkable with their service culture. They really do care what you think, and they are genuine about our joint success into the longer term.”

BEN MARSHALL

Benchmark Financial Planning

“During times of change, it has been reassuring to be with a licensee that regularly engages with advisers and takes feedback seriously.”

FIND A CAPSTONE ADVISER

PROUDLY ASSOCIATED WITH