Alternative wealth accumulation structures

The reduction in the non-concessional contribution cap to $100,000 a year and to nil for clients with total super balances of $1.6 million or more has meant many clients are seeking alternative wealth accumulation vehicles.

For clients with adjusted taxable incomes of $250,000 a year, the impact of the additional 15 per cent Division 293 tax on contributions makes certain alternative vehicles tax neutral when compared to super.

Family trust

Family trusts can be a tax-effective wealth accumulation vehicle for high-income earners. Clients can direct business or investment income earnings into the trust. The trust then needs to allocate all of the income and can make payments to trust beneficiaries with lower incomes. This can be a popular way to support retired parents and children over 18 who are still in higher education.

Accumulating wealth in a family trust can provide clients with control over how, when and to whom income and capital is distributed. This can assist clients who have spendthrift beneficiaries. In addition, assets are generally protected from creditors and relationship breakdowns.

Investment bonds

Investment bonds can provide a tax-effective wealth accumulation vehicle. The investment earnings within the bond are taxed at a maximum rate of 30 per cent, rather than at a client’s marginal tax rate. The bond does not distribute income to beneficiaries so there is no personal tax liability until a withdrawal is made. Withdrawals made after 10 years are fully tax paid. Withdrawals made in the eighth year or earlier result in the investment returns (growth component) being fully assessable, but with a 30 per cent tax offset. Two-thirds of the growth component is assessable for withdrawals made in the ninth year and one-third is assessable in the tenth year. Again, the 30 per cent tax offset applies.

Investment bonds suit many clients because of their tax simplicity. Unless withdrawals are made within 10 years, there is no impact on a client’s personal tax return.

Unlike super funds, investment bonds are not subject to preservation and can be accessed at any time. However, the 10-year tax-paid period provides an incentive for people to invest for the longer term.

Also unlike super, the balance of an investment bond can be used as security for a loan.

Many investment bonds offer access to an internal loan facility, which allows clients to borrow for investment purposes.

Investment bonds offer flexible ownership structures as they can be owned by individuals, joint owners, companies or trusts. Ownership can generally be transferred to another person, organisation or into joint names without incurring additional fees, stamp duty, personal income tax or capital gains tax. The start date of the 10-year tax period also remains unchanged.

Investment bonds can be used by making a single, one-off contribution or as a regular savings plan. Each year, up to 125 per cent of the previous year’s contributions can be added to an investment bond without restarting the 10-year investment period for tax purposes.

Bonds can also offer social security advantages – as the bonds don’t distribute income, they can provide an effective vehicle to enable some clients to be eligible for the Commonwealth Seniors Health Card.

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