Neil Rogan, the general manager of investment bonds at Centuria, said the introduction of the transfer balance cap of $1.6 million, the reduction in contribution caps and the change in the tax treatment of transitional to retirement income streams has had the most impact on investors in the accumulation phase earning a high income and wealthier Australians.
“SMSFs may also be disproportionately affected, particularly those with larger balances,” he said.
Mr Rogan noted that there are tax-effective investment options outside of super, however, all of which have been used by investors for many years.
Creating a company structure to hold investments
SMSF investors, he said, may want to consider creating a company that holds investments on behalf of an investor.
“Company earnings are taxed at 30 per cent, [so] all earnings on the investments held in the company are taxed at 30 per cent, not at the investor’s marginal rate,” said Mr Rogan.
“However, when returns are distributed as dividends, recipients must pay the difference between the company tax rate of 30 per cent and their marginal tax rate.”
Investors should also be aware of the costs in setting up, maintaining and running a company, he said.
Creating a family (discretionary) trust to hold investments
A family trust, similar to a company, he said, can hold investments on behalf of beneficiaries.
“There is no real tax benefit to the family trust structure, because the trust must distribute all earnings, but there is some flexibility in distributions,” he explained.
“It is possible to distribute to low income family members and also to change to whom you distribute every year. In some family situations, these may offer flexibility to vary who is the beneficiary of distributions each year.”
If the family includes low-income earners, then this may provide taxation advantages, however, it is important to note that, legally, all distributions are at the complete discretion of the trustee, explained Mr Rogan.
“This means that a potential beneficiary of a discretionary trust only has a right to be considered for distributions,” he said.
An investment bond, Mr Rogan explained, is an insurance policy where the investor nominates a life to be insured and a beneficiary. It is a tax paid managed fund.
Investors, he said, can choose to invest in a range of investment options depending on their risk profile ranging from Australian shares to cash.
“All earnings from the underlying portfolio are taxed at 30 per cent, and tax is paid by the bond issuer,” he said.
“Earnings are then re-invested in the bond and are not distributed. For this reason, the investor does not need to include earnings from the bond in his/her tax return.”
There is no limit on an initial investment into an investment bond, he said, and an investor can make additional contributions into the bond of up to 125 per cent of the previous year’s contributions.