Investment Bonds and Company Structures


Can a company purchase a Centuria Life Investment bond and transfer the bond to the shareholders?

Generally this may not produce a tax efficient outcome unless the later transfer could be made on loan account, to reduce a loan from the shareholders, otherwise a bond redemption by the company whenever made (before or after 10 years) simply results in ‘net untaxed’ profts to the company meaning unfranked dividends then being paid to the shareholders, who would pay tax at their full marginal rate (without any franking tax offset).
A ‘nil consideration’ direct asset transfer of the bond from the company to the shareholders could trigger one of the following adverse tax events:

  1. Punitive fringe benefits tax, payable by the company if the asset were viewed to be in respect of employment.
  2. Non cash business benefits tax payable by the shareholders if the asset were viewed to be in respect of a business relationship.
  3. Division 7A tax, payable by the shareholders if the payment were not Division 7A compliant.

What may be an ideal ownership structure company or personal?

It may be ideal for the investment bond to be held by the shareholder of the company directly and if not as an asset of a family trust. To achieve this outcome, the investment bond holder will need to be funded to acquire the bond. A Division 7A compliant loan from the company could help provide a temporary funding source.
If the individual is the bond holder and also the life insured, they could provide for nominated beneficiaries and can be changed from time to time. The investment bond also offers bankruptcy protection of both the bond and its proceeds from creditors.

If a family trust owned the bond?

With a family trust owning the bond, there is flexibility on who may receive proceeds in the future, the ‘flow through’ tax structure is retained for the purposes of tax rebated bond growth within 10 years, and tax-free bond growth distributions after 10 years in the hands of the trust beneficiaries.

Using a corporate beneficiary or ‘bucket company’ to limit tax paid:

Use of a bucket company can be viewed as an ‘old strategy’ that may only temporarily delay the eventual marginal tax rate attracted particularly when income sourced dividends are paid to underlying corporate shareholders. Assuming in this case they are individuals.
Maintaining a company also has an annual cost as well as costs associated with winding up or deregistering the company. A much simpler, more cost effective and tax efficient option may be to have a trust hold an investment bond as an investment asset:

The benefits of this strategy are:

With a family trust owning the bond, there is flexibility on who may receive proceeds in the future, the ‘flow through’ tax structure is retained for the purposes of tax rebated bond growth within 10 years, and tax-free bond growth distributions after 10 years in the hands of the trust beneficiaries.

  1. The bond traps all assessable income and pays tax at a maximum of the current corporate rate of 30% within the bond itself.
  2. If the bond were held for at least 10 years or until certain events at any time such as death, accident, serious illness affecting the bond’s life insured or unforeseen financial difficulties affecting the bond investor, withdrawn amounts are tax free in the hands of the trust. The tax-free character of the bond withdrawn amount also flows through to the trust beneficiaries as well, the investment bond can permanently cap the tax rate at 30%.
  3. Because the Investment Bond is internally taxed, the tax return process for the trust is simplified as is the nomination of the underlying beneficiaries.

Making withdrawals prior to the 10 years:

  1. Withdrawals form the investment bond can be made at any time.
  2. If an amount were part-withdrawn within the ’10 year eligible tax period’ under tax ruling IT 2346’s formula of the withdrawn amount would be treated as the assessable growth component. That amount, when reported in the investor’s tax return and attracts the investor’s tax rate, would automatically also attract a 30% bond tax rebate, without any imputation style gross up calculation which would otherwise push up taxable income.
  3. Withdrawals made in exceptional circumstances are tax free in the hands of the investor even if they are made within 10 years.
  4. If longevity is desired, the bond can be assigned from the trust to someone else without having to disturb the bond’s original ’10 year eligible tax period’.

Conclusion

There are a number of considerations when looking to invest via a company or a trust, if you are looking for a simple tax effective investment structure a Centuria Unit Linked Investment Bond may be appropriate.

You can download a PDF of the strategy here.


Disclaimer:
Centuria’s Investment Bonds offer a tax effective investment vehicle outside of superannuation. They have features that investors should consider if they wish to invest outside of superannuation. Suitability of an investment in a Centuria Investment Bond will depend on a person’s circumstances, financial objectives and needs, none of which have been taken into consideration in this advertisement. Prospective investors should obtain and read a copy of the Product Disclosure Statement (PDS) and consider the information in the PDS in light of their circumstances, objectives and needs before making a decision to invest. We recommend that prospective investors consult with their financial adviser.  This document is not an offer to invest in any of Centuria’s Investment Bonds. Investment in Centuria’s Investment Bonds are subject to risk as detailed in the PDS. Centuria will receive fees in relation to an investment in its Investment Bonds. Issued by Centuria Life Limited ABN 79 087 649 054 AFSL 230867.