1 July 2017 super changes case study #1 

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Case study #1 – Anthony

Anthony is 45 years old and he’s invested in the property market over the long term and given that some of the returns have plateaued on his inner-city investment property, and he’s realised a healthy gain. He’d like to liquidate that property, and invest the proceeds of that fund. So, he’s paid down his mortgage, he’s also maximised his concessional and non-concessional contributions and is looking at what he can do with the surplus proceeds from his investment property of around two hundred thousand dollars and invest them in a tax effective way. In this case, Anthony earns very good income, and he doesn’t need access to the funds for at least a 10-year period given he’s only 45. He doesn’t need access to the funds until he’s 55.

So, Anthony could consider a number of options. He can invest the funds into a managed fund, he could invest them directly into the share market in his own name or he could invest by a family trust.

One thing that is important to Anthony is that you know he has access to franking credits that can help reduce tax that’s being paid on the investment. Anthony’s advisor in this case suggests that Anthony invests the money, his money in an investment bond into the Australian share investment bond and that investment bond pays a maximum rate of thirty per cent tax per annum. In addition to this, Anthony can also afford to invest an additional amount to his investment bond of around $20,000 per annum for the first three years and then after that he doesn’t contribute, he only reduces his contributions and invests $5,000 per year.

In discussing the strategy with Anthony, his advisor does suggest to him that he can redeem the bond in 10 years’ time and pay no additional tax on any withdrawal. So, when Anthony reaches age 55 based on some calculations we’ve done, Anthony has accumulated appropriately $500 and $51,000 thousand dollars into the bond, which is estimated to be around thirty-five thousand dollars higher than investing into a managed fund at his own personal marginal tax rate. And the chart here shows a comparison between investing in an investment bond versus a managed fund over the period of time.

Now, if there are other choices that Anthony could have made around this investment, he could have chosen to invest the $200,000 into a discretionary trust or invest in a managed fund in his own name. And potentially, given he would be the sole beneficiary, the result would potentially be the same. And this is because the trust pays no tax but the earnings passed on to the beneficiaries and they pay the tax on the marginal rate. Now, potentially if Anthony had children, depending or a spouse, depending on what their marginal tax rate is or are, he could consider using a discretionary trust but then he would need to look at the cost setting that up. And also, consider the cost of maintaining it. But in this case, you know there’s just Anthony and therefore the investment bond is probably one of the best options for him to consider given he’s the only beneficiary.

And as I said before, if he were to set up the trust, he would need to consider the cost of establishing and running the trust. But equally said, if there were beneficiaries at differing tax rates this would also, in Anthony’s family – he would need to consider this as part of that process in weighing up whether discretionary trust or an investment bond may be better for his personal circumstances.

Estate planning
One of the other challenges these superannuation changes bring is changes to the tax to financially non-dependent beneficiaries from a superannuation payout and therefore for many it led to them to reconsider their estate planning option. So many people spend their whole life building their wealth and trying to optimise it for their retirement planning with everything in mind with how they can distribute what they have left in line with their wishes.

And so, this diagram is just a diagram, diagrammatically showing even through the wealth building and the retirement stages of life, understanding the asset protection and planning needs of your client are particularly important, particularly around fulfilling their wishes on their death. And looking at how this can be done in a very tax-effective and very clean and clear way to provide clients with certainty in their estate planning needs.

So, in looking at something like an investment bond, investment bonds do fall outside the estate particularly where a beneficiary has been nominated and they are paid tax-free to the nominated beneficiary. Now, on death, the bond could only exist for a day and the life insured, the owner dies and those proceeds are paid tax-free to the beneficiary that has been nominated.

Where estate planning potentially is a not well thought out or where there are issues in estate planning is where the estate is distributed to unintended beneficiaries, there are legal fees in trying to decipher the estate. It erodes the wealth because potentially there are tax implications when assets are sold. So, something like an investment bond can avoid or minimise some of these consequences and ensure that assets are held or passed to the appropriate beneficiary at the right point in time.

An example of this as I said before, most grand-parents love their grandchildren these days more than their children but also people have most complicated family arrangements. I think the current divorce rate is 40-43%. And many people who are either on second or third relationships and ensuring that the wealth accumulated through their working lives are passed onto the appropriate beneficiaries is often an issue for them and something that occupies a lot of their thinking.