Budget puts paid to tax friendly super strategies for the wealthy
Investors urged to consider tax-effective investments outside of super
Sydney, 18 May 2016: “The 2016 Federal Budget made it clear that the Government’s changes, if passed into legislation, will force wealthier investors to consider alternative investments to complement their super when it comes to structuring their finances and planning for retirement. Making additional contributions to Super may no longer be the best option in many cases.”
These are the words of Neil Rogan, General Manager of Investment Bonds for Centuria, who today confirmed that a number of the proposed changes to superannuation announced in the recent Budget would curtail the ability of wealthier Australians to use super as a retirement savings tool should they be passed into legislation.
Mr. Rogan said that the Treasurer’s stated aim of reducing tax breaks for the wealthy inherent in the current system, means that financial advisers may need to find ways in which their high net worth clients can complement smaller contributions to super with other tax friendly structures.
“There are a number of options available, including family trusts and negative gearing, but one which is particularly suited for consideration by investors with a medium to long term investment horizon is investment bonds,” he said.
Investment bonds, like managed funds, allow for investment in a range of asset classes, however, like superannuation, tax is paid within the investment bond structure, and not by the investor, at the corporate tax rate of 30%. Franking credits and tax deductions can also reduce the effective tax rate still further. Additional contributions can be made to the bond each year, and if it is held for 10 years, no personal tax is payable on the principal or earnings.
Mr. Rogan said that the proposed reduction in the annual concessional contribution cap from $30,000 or $35,000 for the over 50s to $25,000 per annum for everyone, means that those who were contributing $35,000 p.a. in the past could consider contributing the excess $10,000, or even more, into an investment bond.
“They have some very attractive features. There is no limit to the initial investment. The investor does not need to include the bond in his/her annual tax return and after 10 years, all the proceeds from the bond, both capital and earnings, are personally tax free.
“Investment bonds offer an attractive alternative to super that should be considered now that the ability to contribute to super tax-effectively has been curtailed,” he said.
Mr. Rogan went on to explain that the reduction in the non-concessional cap from $180,000 p.a to a lifetime limit of $500,000 – backdated to 2007 – means that investors who have already reached their limit will need to review their options.
“Again, investment bonds can help. There is no limit to what can be contributed in the first year, and additional annual contributions of up to 125% of the previous year’s contribution are allowed.
“And if the investor wishes to withdraw the proceeds after 10 years, the proceeds are free of any additional tax and their adviser can establish a regular withdrawal program of this income, if the investor doesn’t want to take the full proceeds as a lump sum,” he said.
Finally, Mr. Rogan said that the potential new rules around contributions to super would mean that the ability of high net worth investors to use super as an intergenerational wealth transfer tool could also be limited.
“Because an investment bond is also a life insurance policy, the proceeds can be directed to a nominated beneficiary and, should the investor die, will be paid to the beneficiary without any tax payable by the beneficiary, regardless of how long the bond has been held, and will not form part of the estate,” he explained.
“We are by no means suggesting that anyone make a hasty decision about changes to portfolios, but we would encourage them to research the pros and cons of strategies outside of super. Some may be more tax-effective than they think,” Mr. Rogan said.
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