Lifeplan NextGen Investments

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1 Lifeplan NextGen Investments Essential Guide to Investment Bonds Adviser Use Only Everything you wanted to know about Lifeplan NextGen Investments. March Is the PDS FoFA compliant? The Lifeplan NextGen Investment PDS dated 21 February 2014 is FoFA compliant. Who are the parties to an investment bond? Owner or investor who makes all investment decisions. Life insured may be the same as the owner but they have no control over the investment. Investment bonds are a life insurance policy (investment only) the life insured determines the maximum holding period of an investment bond. Beneficiaries (optional) and they may receive the proceeds of a death claim the investment bond becomes a non-estate asset and does not require probate for the distribution of benefits. Who can invest in an investment bond? Anyone over the age of 10. Between the ages of 10 and 16, parental and guardian consent is required. Multiple investors (owners) are permitted. Companies and trusts. How much can be contributed? There is no limit to contributions in the first 12 months of investing. Contributions in future years are limited to the 125% rule. What is the 125% rule? This rule limits contributions in the second year of investing and beyond to 125% of the previous year s contributions. 125% is the maximum permitted lesser amounts are acceptable. Example: Contributions during the first year of investment total $10,000 the table shows the maximum contribution being made every year. Maximum Additional Contribution 1 $10,000 2 $12,500 3 $15,625 Investment Year 4 $19,531 5 $24,414 6 $30,518 7 $38,147 8 $47,684 9 $59, $74,506 How are investment bond earnings taxed? Lifeplan pays the tax on annual investment earnings at the corporate tax rate currently 30%. However, this rate may effectively be less due to the use of allowable tax credits and benefits eg franking credits. Investors will not pay tax on the investment earnings while they remain invested.

2 2 How are withdrawals taxed? Personal income tax is only payable on withdrawals in the first 10 years from an investment bond often referred to as the 10 year rule. Withdrawals are based on ATO IT2346 and are part capital and part investment earnings as per the following table: Year Years 1 8 Year 9 Year 10 Year 11 onwards Taxable Component All earnings 2/3rds of earnings 1/3rds of earnings Nil A 30% tax offset applies to the taxable component of any withdrawal. Example: A withdrawal occurs which includes $9,000 of investment earnings: Year Taxable Component Tax Offset Years 1 8 $9,000 $2,700 Year 9 $6,000 $1,800 Year 10 $3,000 $ 900 Year 11 onwards Nil Nil What is the withdrawal formula? ATO IT2346: Assessable amount = A/B x [(B + C) - (D + E)], where A = amount withdrawn B = bond value before withdrawal C = sum of any earlier withdrawals D = gross contributions (without deducting charges) E = sum of previously assessable amounts Does capital gains tax apply to investment bond withdrawals? No the taxable earnings (including capital growth) of an investment bond withdrawal is assessed at marginal tax rates less any applicable tax offset. Does tax apply when switching investment options? No personal tax is not payable when switching investment options. What is an adjustable taxable income (ATI)? Many benefits, tax offsets and levies are based on income. Adjusted taxable income is a method of ensuring equity between those that can structure their financial affairs to reduce taxable income and those that cannot to ensure that an unfair advantage is not received. Adjusted taxable income generally includes: Taxable income; Reportable fringe benefits or adjusted fringe benefits; Reportable super contributions (salary sacrifice); and Total net investment losses. ATI has a number of variants and not all benefits, tax offsets and levies are assessed using the same methodology.

3 3 What are the benefits and levies that are influenced by taxable/adjusted taxable income criterion? Senior Health Care Card. Low Income Tax Offset. Senior Australian and Pensioner Tax Offset. Medicare Levy and Medicare Levy Surcharge. Private Health Insurance Rebate. Family Tax Benefits. Baby Bonus. Low Income Superannuation Contribution Refund. Super Co-contribution. How does an investment bond help with ATI? The annual earnings of an investment bond are excluded from ATI calculations while funds remain invested. Should a withdrawal occur in the first 10 years, only the taxable component of the withdrawal will be included in an ATI calculation. Having no or significantly reduced investment earnings contributing to ATI, may entitle an investor to receive a benefit and/or maximise entitlements. How does a tax paid return compare to a non-tax paid return? When comparing investment returns, it is important to consider the effect of tax on the return ultimately achieved by an investor. The following table, valid from 1 July 2012, compares a range of after tax investment bond returns (left hand column) to the before tax returns an investor would need if they paid the tax themselves. Annual Tax Paid Return ATO Marginal Tax Rate (excluding Medicare Levy) 19.0% 32.5% 37.0% 45.0% Equivalent Return required when tax is paid by the investor: 2.0% pa 2.5% 3.0% 3.2% 3.6% 3.0% pa 3.7% 4.4% 4.8% 5.5% 4.0% pa 4.9% 5.9% 6.3% 7.3% 6.0% pa 7.4% 8.9% 9.5% 10.9% 8.0% pa 9.9% 11.9% 12.7% 14.5% What is the difference between marginal tax rates (MTR) and effective/average tax rates? A strict definition is that MTR is the tax rate on the last dollar of income earned. Reality is that we have a tiered tax system which is a five tiered system. Effective Tax Rate is the average rate of tax that an investor pays. It is calculated by dividing their total tax liability by their taxable income. We have assumed that this hypothetical investor has no tax rebates/offsets to reduce their tax liability. If they do, the tax liability figure in the calculation needs to be reduced for the rebates/offsets. Example: An investor with a taxable income of $175,000 excludes Medicare Levy: Has a MTR of 37.0% because every $1 they earn over $80,000 is taxed at 37.0%. The tax liability is $52,697. Dividing $52,697 by taxable income of $175,000 produces an effective or average tax rate of 30.1%. Does non-resident withholding tax apply? An investment return from an investment bond is generally treated as a reversionary bonus for tax purposes. Currently this type of bonus is not among the classes of income (such as interest, dividends, royalties, trust income, etc) that requires a withholding deduction prior to payment to a non-resident investor. Accordingly, unless the Tax Commissioner specifically directs a life insurer to withhold an amount from a particular bond investment payout, non-resident withholding tax is current not applicable to a bond investment. Can overseas investors purchase an investment bond? The PDS can only be issued to people within Australia so provided the investor is in Australia at the time of applying, they can invest. Australians living offshore may invest provided they were in Australia at the time of receiving the PDS.

4 4 Can ownership be changed? Yes ownership of an investment bond can be changed via a process called assignment. Provided an assignment is done as a gift, it does not create a personal tax consequence for the original investor and the subsequent investor. The new owner/investor inherits the original start date of the investment for tax purposes. Can the life insured be changed? The life insured cannot be removed (revoked). With Lifeplan NextGen Investments, an additional life insured may be added after the investment has commenced. How are investment bonds taxed on death? No tax is payable on death irrespective of how long the investment bond has been invested for and who receives the proceeds. Is there a relationship requirement between the owner and life insured to be able to use a beneficiary nomination? Yes in order to have a valid beneficiary nomination the owner and life insured must be identical. Multiple owners and multiple lives insured are permitted, but again if the investor is an owner, they must also be a life insured to have a valid binding nomination. Investments in the names of companies or trust cannot have a binding nomination. Who can be a beneficiary? Anyone can be a beneficiary individuals, companies, trusts and charities. No age restriction. No family or interdependent relationship required insurable interest is no longer a necessity. What are the estate planning features? Tax free lump sum proceeds paid to the nominated beneficiaries or to the estate where no valid nomination has been made. Lifeplan NextGen Investments provides a unique feature where these tax free proceeds can be utilised to create a flexible income for the beneficiaries Wealth Preserver. What are some examples of how these estate planning features can be customised? A lump sum payable immediately on the death of the last life insured. A deferred lump sum paid at a predetermined point in time after the death of the last life insured. An income stream that commences immediately on the death of the last life insured. An income stream that commences at a predetermined point in time after death of the last life insured. The investor can structure the estate planning features to provide the beneficiaries with the choice to receive a lump sum or income stream. Any combination of the above. How do you invest for a child? Children under the age of 18 usually do not have legal capacity to enter a contract. Children from the age of 16 may invest in an investment bond with full ownership rights and entitlements without reference to a parent or guardian. Children between age 10 and 16 may invest in an investment bond with parental or guardian consent all transactions prior to age 16 require consent. For children under 16, a child advancement policy such as NextGen Child is available: Adult is owner and child is the life insured. Age when policy is to be transferred (vested) to the child is nominated can be between ages 10 and 25. Investment is automatically vested (transferred) to the child without any tax implications for the original investor or the child who inherits the investment with its original start date. No stamp duty payable on the vesting.

5 5 Are there are any ownership restrictions on NextGen Child? NextGen Child investments can be owned by individual or joint owners aged 16 or more. Investors cannot be a company or trust. What happens to a NextGen Child if the owner dies? Executor or administrator of the owner s estate holds the investment in trust for the child until the vesting age. Executor or administrator is required to administer and operate the investment for the benefit of the child and may make withdrawals, if necessary, for the maintenance of the child. What happens to a NextGen Child if the child dies? As the child is the life insured, this event triggers a tax free payment to the owner of the NextGen Child. What are the fees/costs for Lifeplan NextGen Investments? Fees associated with the underlying investment portfolios can change, please refer to the current PDS and any relevant SPDS for up to date information. Details can also be obtain from (under Lifeplan Products > NextGen Announcements) or by calling our Adviser Solutions Team on Lifeplan currently absorbs stamp duty. Stamp duty is a state based revenue so the applicable rates do vary. Example: Stamp duty on $100,000 investment is $ in Victoria, $99.00 in NSW and $99.00 in Queensland. What is an investment transaction cost (ITC)? An ITC recovers the cost of brokerage and certain other costs of investing incurred by the underlying investment options and serves the same purpose as a buy/sell spread. Transparent fee that is clearly noted on investor statements. How does the administration fee rebate work? An automatic rebate of the administration fee that is applied to investments of $500,000 or more. 0.14% pa on the balance from $500,000 < $2,000,000; and 0.21% pa on the balance of $2,000,000 or more. Colonial First State Premium Cash investment option is not eligible for the rebate. Rebate calculated monthly and credited to the investment usually within two months of 30 June. What are some of the client needs that an investment bond may solve? Tax effective income. Alternative to super for those that are too young, too old or have too much. Wealth transfer solutions. Aged care. Reduce taxable income to improve benefits and offsets, and reduce levies. Where can more information on Lifeplan NextGen Investments be found? The Lifeplan Business Development Manager Team and our Adviser Solutions Team are able to help you during business hours. The current PDS and common forms can be downloaded from the Lifeplan website (www.lifeplan.com.au) and the Lifeplan Adviser Toolkit section of the website contains our strategy documents and calculators.

6 6 How often have investment bond rules been changed? Government changes to insurance bonds have been minimal. Tax rate changes over the last 30 years: Friendly Society Life Office Prior to 1983 Nil 39% to % 39% to % 39% to % 39% % 34% to present day 30% 30% Since , the distinction between friendly societies and life offices for tax purposes has been removed and the maximum tax rate on fund earnings aligned with the corporate tax rate. Bonds issued after 7 December 1983 require a minimum 10 year holding period to be eligible for tax paid bonuses. Regulation and Legislation: Lifeplan is registered as a Life Company under the Life Insurance Act The operations of Lifeplan are governed by its Constitution, the Corporations Act 2001 and the Life Insurance Act which together set out the conditions under which Lifeplan is required to operate. Lifeplan is regulated by the Australian Securities and Investments Commission (ASIC) and the Australian Prudential Regulation Authority (APRA). APRA and ASIC also regulate banks, credit unions, building societies and insurance companies. ASIC regulates registered managed investment schemes. Lifeplan is subject to an annual audit of operations and financial reports, including the benefit funds, by independent audit and actuary firms. The following are the principal income tax provisions that relate to investment bonds as would be relevant to a bond investor: ITAA36 Income Tax Assessment Act 1936 ITAA97 Income Tax Assessment Act 1997 ITR Income Tax Rates Act 1986 Transaction Tax Effect Reference Accruing or on-going investment growth in the bond fund (of the life insurer) Additional bond contributions Realised capital gains Bond investor: No assessable income. Bond fund: Assessable on realised income and profits. Tax provided on unrealised income and profits. Capital gains treated as revenue profits. Current bond fund income tax rate (before applying tax offsets) = 30%. If they do not exceed 125% of aggregate bond contributions in immediate preceding year: Bond start date for eligible period is unaffected. If they do exceed 125% of aggregate bond contributions in immediate preceding year: Bond start date for eligible period is notionally shifted to the start of the bond year in which the excess contribution is made. Capital gain is disregarded: If bond owner is the original owner. If bond owner is the subsequent owner (by assignment) and acquired the bond for nil consideration. Bond owner has no entitlement to bond growth until withdrawal. Normally, sections 6-5 and 10-5 [ITAA97]. Deductions under section 8-1 and other relevant provisions [ITAA97]. Section 23A [ITR]. Subsection 26AH(13) Section [ITAA97]

7 7 Transaction Tax Effect Reference Receipt of bond proceeds after eligible period Receipt of bond proceeds during eligible period Part-withdrawals from a bond during eligible period Rebate on assessable component of bond proceeds Switching between investment options of a bond Direct investment directions by bond owner (other than investment option switching selections) Treated as a capital receipt, and is excluded from assessable income. Included in assessable income, except where tax-free proceeds are received as a result of certain defined events: Death, disability or illness of the life insured. Unforseen serious financial difficulties of the bond owner. Assessable component limited by formula, which reflects the proportion of growth to date. Currently attracts a non-refundable tax offset of 30%, but can offset tax on other assessable income. Unused bond tax offset cannot be carried forward to future years. Normally does not give rise to a taxing event for the bond owner, and does not affect the bond s eligible period start date. Not permitted by tax rules. If allowed under particular bond rules, bond would not be taxed as a life insurance policy and on-going income may be assessable in bond owner s hands. Section 26AH Section 26AH Subsection 26AH(7) Taxation Ruling IT 2346 (especially paragraph 11) Section 160AAB Subsection 4-10(3) and Division 65 [ITAA97] Taxation Determination TD 94/82 Taxation Determination TD 92/166 Bond financing costs Interest and other funding costs disallowed. Section 67AAA [ITTA36] For more information about the benefits of Lifeplan NextGen Investments, please speak to your Lifeplan Business Development Manager on or visit today. Lifeplan Australia Friendly Society Limited ABN AFS Licence (Lifeplan) General Enquiries 111 Gawler Place Adelaide SA 5000 Telephone Facsimile Website Lifeplan Australian Friendly Society Limited ABN AFSL is the issuer of Lifeplan NextGen Investments. Lifeplan does not give tax or legal advice. The information included in this document is based on Lifeplan s interpretation of the relevant tax laws as at the date of writing. These laws are subject to change. The application of tax law depends on investor s individual circumstances. Investors should seek their own taxation advice. This document is for Adviser Use only and is not intended for distribution to investors. The information contained in this document is general information only and does not take into account the specific investment objectives, financial situation or needs of any particular investor. Nothing in this document should be taken as personal advice. Before acquiring or deciding to hold this product, investors should obtain the Product Disclosure Statement (PDS) available from the issuer Lifeplan, and consider whether the product is appropriate for them. LP

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