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Are there any tax-effective investment strategies left?


Promoted by Centuria Capital Limited.

The humble investment bond has been operating as an investment and estate planning tool for decades, says Michael Blake from Centuria.

July 1 2017 marked the biggest changes to superannuation in over a decade, as legislation introduced in the 2016 Federal Budget came into effect. One outcome of the new legislation is that Australians with a super balance of $1.6 million are now required to pay 30% tax on their compulsory concessional contributions. These Australians can no longer make any non-concessional contributions at all.

As we approach the 2018 Federal Budget, it’s timely to consider how ongoing policy changes around various investment vehicles may impact you. The advantages for further investment into superannuation by Australians who earn a high income or have managed to save and contribute enough to have a high super balance are dramatically reduced. Last year the Labor party targeted family trusts and suggested distributions be taxed at the company rate of 30%. This year’s political hot potato was the plan to scrap cash payments from excess franking credits. 

Is tax-advantaged investing even possible anymore?

Since its inception, super has unquestionably been the most tax-effective long-term savings structure and for the majority of Australians, it still is. At the same time, recent changes have made the system less, not more attractive. It’s hard to imagine that there won’t be yet more changes in the future – potentially making it less attractive still.

Consider investment bonds

Now may be the ideal time to look at what else is available in the way of long-term tax-advantaged investment plans. Investment bonds are one option that have been around for decades.

So, what are investment bonds? Technically a life insurance policy, with a life insured and a beneficiary, in reality an investment bond operates like a tax-paid managed fund. Investors choose from a range of underlying investment portfolios, including equities, fixed interest, property and cash, as well as combinations of each, depending on their investment horizon, objectives and risk profile.

Returns from the underlying investment portfolio of the investment bond are taxed at the company rate, a maximum of 30%. This tax is paid within the bond structure, not by the investor. Returns are then re-invested into the bond, and are not distributed. Depending on the underlying portfolio, the effective tax rate paid by the bond may be lower than 30%, if the portfolio contains equities with franked dividends, for example. This means that if you are an investor paying 30% tax on contributions into super, an investment bond could be as tax-effective as super, if not more so, and it doesn’t lock your money up until you are 65. 

Because returns from the bond are not distributed to investors, the bond does not need to be included in the investor’s personal tax return.There is no limit to the amount which can be invested in an investment bond, and additional contributions can be made annually, up to 125% of the previous year’s contribution.

An investment bond is simple to set up, and aside from the net fee charged to the policyholder does not incur the costs to run, in the way that a family trust or company structure can. After the bond is held for 10 years, the proceeds can be withdrawn tax paid, without any personal tax obligations.

An ideal estate planning tool

An investment bond does not form part of the investor’s estate, and is not included in his or her will. On the death of the life insured, the proceeds of the bond are passed directly to the beneficiary tax-free. Even if this death occurs before 10 years, the beneficiary will receive the proceeds tax free.

Super versus an investment bond?

Super remains a very tax-effective long-term savings plan, and for most of us, it remains the most tax-effective. However, that’s not to say that other structures can’t play an important role, both as part of a long-term investment strategy and as an estate planning tool. And that’s why an investment bond may be worth considering as part of your investment plan. 

Are there any tax-effective investment strategies left?
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