Investment bonds have a range of taxation benefits and features that provide an efficient and cost effective alternative for long term wealth creation, estate planning and intergenerational wealth transfer. Investment bond investors will generally have no personal taxation or capital gains tax reporting or liabilities.
A discretionary or family trust can reduce or even eliminate the level of its distributable income if invested in one or multiple investment bonds. Unlike other investments such as shares, managed funds and term deposits, Investment Bonds do not distribute ‘taxable income’ to investors unless a withdrawal is made within the first 10 years.
Whilst the trust remains invested in Investment Bonds there is no annual income for the trust to distribute. On the death of the life insured under the terms of the bond, the proceeds at any time can be distributed tax free to the remaining beneficiaries.
Case study: Managing distributable income issues in trusts
Scenario
Mel and Tony are looking to retire and have recently sold an investment property that was held within their family trust. The trust was established at a time when their children were also on relatively lower marginal tax rates.
Since then, their children’s assessable incomes have increased to a point where their marginal tax rates are now at 47%.
Both Mel and Tony would like to manage the distributable income generated by their trust and qualify for the Commonwealth senior’s health card which is income tested. They are also aware of deprivation rules which limit the trust’s ability to distribute to the children (who are also trust beneficiaries).
Strategy
Mel and Tony invest the proceeds of the property sale in an investment bond. The investment bond will be an asset of the trust. Tony nominates himself as the life insured under the terms of the bond.
Benefit
Unlike shares, managed funds and term deposits, an investment bond does not distribute earnings, with all earnings effectively re-invested. By investing in a non-income distributing insurance bond, there are no income distributions to be made by the trust to any of the beneficiaries (including Mel and Tony).
When Tony passes away, the investment bond benefit will mature within the trust. The investment bond proceeds, which are capital by nature are then able to be distributed to the trust’s beneficiaries without any personal tax liability to them.
Using an investment bond also has the added benefit of not requiring taxation reporting and management (unless a withdrawal is made within its first 10 years). The withdrawal from an investment bond after 10 years or the transfer of an investment bond from the trustee without consideration to trust beneficiaries does not attract income tax or capital gains tax.
Switching between investment options within an investment bond also does not attract any capital gains tax as any gains (or losses) are contained within the investment bond structure.
