Tax effective complementary option to super

Treasurer Jim Chalmers has signalled, before the upcoming Federal Budget in May 2023, the Federal Government’s intention to legislate the purpose of superannuation. The proposed objective will be to “preserve savings to deliver income for a dignified retirement, alongside government support, in an equitable and sustainable way.”ᵃ As part of these changes, the Government will introduce a doubled tax rate on earnings on superannuation balances of more than $3 million, raising the tax rate from 15% to 30%. 

There’s now an opportunity for Australians to explore complementary investment options outside of their super.

Investment bonds as a tax effective, complementary option to super

Investment bonds are a stable, tax-effective solution that offer flexibility, control and a range of investment options to suit your lifestyle needs.

Unlike super, investment bond funds are not locked until preservation age or retirement, which means funds can be withdrawn at any time. They are popular with high-income earners seeking to reduce tax, protect assets and want more certainty in estate planning.

Similar to superannuation, investment bonds offer a tax effective solution for building wealth, with tax on investment earnings capped at 30%.

Reduce your tax even further

Generation Life’s proven and market leading tax aware process, takes this one step further and allows us to significantly reduce the impact of tax on investment returns by reducing an investment’s tax assessable earnings by offsetting capital investment losses against income. This can bring the tax rate down to as low as 12-15% over a 15-year period.ᵇ

Through a disciplined tax aware approach to trading when we sell investments such as shares, our process ensures that we effectively manage our clients’ portfolios, selling to deliver the best tax outcome.

For example, the long-term expected increase in after-tax performance of Generation Life’s Tax Optimised series is expected to be between 0.40% and 2.60% p.a.ᶜ when applying these tax aware principles to an investment bond structure. This builds upon the tax arbitrage already available to investors on higher personal marginal tax rates who use the Generation Life investment bond product.

The compounding effect of this process over time can be significant. The longer you are invested, generally the better the after-tax outcome.

Tax is often the largest cost you will incur on your investment—not fees for a financial adviser, platform usage or select products. This is why when it comes to making any investment decision, it’s important to be aware of the impact of tax on your overall investment performance.

After all, investment returns go up when taxes go down. It’s that simple.

Here’s how it works

Generation Life’s market leading tax aware process seeks to deliver improved after-tax returns with no additional investment risk. Below are four ways in which we reduce the tax paid on investments:

Unique investment bond structure – Reducing an investment’s tax assessable earnings by offsetting capital investment losses against income.ᵈ Unlike individual taxpayers, investment bonds have specific tax rules that allow them to take advantage of this to help reduce an investment bond’s tax assessable earnings.

Disciplined approach to trading – When we need to sell investments, such as shares our process ensures that we effectively manage our clients’ portfolios to deliver the best tax outcome.

Reduce the impact of other investors – Where possible, we will look to invest directly rather than accessing an investment strategy through a pooled structure such as, a managed fund. Doing this ensures that our tax position, that is the level of assessable income, isn’t impacted by the trading decisions of other co-investors in that pooled arrangement.

Compounding returns – The less tax paid, the more that is left to be invested. The compounding effect of this over time can be significant. The longer you are invested, generally the better the after-tax outcome.

Example of compounding effect*

If you reduce only 1% of your earnings a year that are subject to tax, it is estimated that you will have over 85% in extra return in a 15-year period using a Global Shares Portfolio.ᵉ

*Assuming an additional return on an initial investment of $100,000.

How to access Generation Life’s leading tax smart approach - our Tax Aware series of investments

Generation Life’s unique Tax Aware process can be accessed through the investment options available as part of our investment bond product offering. Unique to Generation Life, we provide three distinct levels of innovative, tax effective investment options as part of the Tax Aware series of investment options:

Tax Advantage - offering the core benefits of the investment bond’s tax structure, where ongoing earnings are taxed within the investment bond at a maximum tax rate of 30%.

Tax enhanced - designed to carefully manage how the underlying investments are bought and sold when held through a pooled investment arrangement where investments are held in underlying managed funds.

Tax optimised - generates tax efficiencies by structuring the holding of the investment through direct ownership of the underlying assets, rather than through a pooled investment arrangement.

Your financial adviser can help you determine the right investment options for your specific needs.

To find out how you could significantly reduce the impact of tax on your investment returns, speak to your financial adviser.

ᵃ https://ministers.treasury.gov.au/ministers/jim-chalmers-2022/media-releases/consultation-begins-legislating-objective-super

ᵇ Capital investment losses refers to losses realised on the disposal of investments that are treated as revenue losses for tax purposes. Indicative forecast effective average tax rates – these represent the estimated forecast average annual tax as a percentage of earnings for each 12-month period over a forecast period of 15 years. Actual tax amounts payable are not guaranteed and may vary from year to year based on the earnings of an investment option.

ᶜ Over backdated 10-year period (based on average return) on Funds launched in Tax Optimised series with no change to investment risk when you optimise for tax. The information provided is general in nature and does not consider the investment objectives, financial situation or needs of any individual and is not intended to constitute personal financial advice. Generation Life does not make any guarantee or representation as to any particular level of investment returns. Past performance is not an indication of future performance.

ᵈ Capital gains or losses refer to gains or losses realised on the disposal of a fund’s investments which are treated as revenue gains or losses for tax purposes.

ᵉ Using the average annual MSCI World ex-Australia (with net dividends reinvested) in Australian dollars Index return over the 10 year period to 31 January 2023.