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.
Money can be withdrawn from the investment bond at any time, however if you withdraw your money before the 10 years is up, some of the income may be taxable, depending on when the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.
“Capstone made everything so easy by providing all the templates and support we need which makes me feel comfortable that I am in good hands with my licensee. I would highly recommend Capstone to any fellow Accountant."
Hillyer Riches Accountants
“We have gained assistance with transitioning to the new regulatory environment and provided a new service of strategic financial planning. Capstone have been of tremendous value in assisting with this transition."
“I would recommend Capstone to any accountant seeking to become licenced within the financial services industry. Their personal service and support to me and my firm has been exceptional."
“I joined Capstone Financial Planning in 2003 as I was looking for a Group that could offer a high level of independence and freedom that came from not being institutionally owned."
Willow Wealth Management
“Compliance support and feedback is crucial to our business. The Capstone team are always there to assist us in improving and providing best advice and best practice standards. Their input is always positive and constructive."
Nicholson Financial Planning
“I would happily recommend Capstone as a licensee to other advisers. The Capstone staff are friendly, knowledgeable, and professional, and they are genuinely committed to meeting their advisers' needs. I feel very secure in the knowledge that I have Capstone backing my business.”
Acquire Strategic Advisers
“Capstone’s support has been exceptional and consistent from the time our business made the transition. Capstone is continually trying to enhance their service offerings to their advisers, at both the higher level, and more specific lower levels within our business. They are an exceptional licensee and lead from the front.”
“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.”
“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.”