Super fund members looking to direct assets to a beneficiary prohibited by law can use investment bonds to do so, but must be aware early withdrawals will impact the tax benefits of the vehicle, according to a technical specialist.
BT technical consultant Tim Howard said investment bonds may be a viable option for some superannuants as they have no contributions tax, contributions limits or age-based limits, and the nominations of beneficiaries were not limited by the Superannuation Industry (Supervision) (SIS) Act.
“There is some flexibility around nominations. With super we can only nominate a SIS dependant, which includes our estate, but with an investment bond we can nominate anyone to receive its proceeds in the event we pass away without the need to take into account whether they’re an eligible beneficiary or not,” Howard said today during an online adviser briefing.
“From an estate planning perspective, in the event that a beneficiary has been nominated, they will receive the proceeds of the bond outside of the estate. It’s not an estate asset and they will receive it tax-free.
“It’s a good way to leave money to someone who does not meet the SIS definition and might be a good alternative to a testamentary trust, or estate assets, for dealing with smaller amounts of money.”
He added while earnings were taxed at a flat rate of 30 per cent within the bond, compared to 15 per cent in superannuation, there were tax benefits available to the investment bond holder on withdrawal, but these were only applicable after eight years and if contributions did not breach the 125 per cent rule.
Any withdrawal within the first eight years would result in any investment growth being fully assessed in the bond holder’s tax return and this would fall to two-thirds after the eighth year, one-third after the ninth year and no tax paid after 10 years, he pointed out.
“From a taxation perspective, the most important rule to keep in mind is the 125 per cent rule, which states that as long as you don’t contribute to that bond more than 125 per cent of your previous year’s contribution, then after 10 years you can make a withdrawal tax-free,” he said.
“If you were to pass away, however, within that 10-year period and the bond goes to a beneficiary, they are able to realise that investment tax-free.”
