Breaking down Non Concessional Contributions
In the latest superannuation changes the government has made amendments to Non Concessional Contributions (N.C.C.) to superannuation funds.
Non Concessional Contributions (N.C.C.) are those contributions that we make to our own superannuation fund from our after tax earnings. They are not contributions made on our behalf by our employer.
Non Concessional Contributions tend to become more popular later in life when the children have left home and the home mortgage has been paid off. As a result of the above two expenditure categories declining our savings tend to improve.
Prior to the recent changes we could make Non Concessional Contributions of up to $180,000 per year and even make, in some cases depending on our age, two years contributions in advance.
From 1 July 2017, if our superannuation balance is greater than $1.6 million we cannot make any N.C.C. to our retirement fund. The main reason for making such a contribution is to have the earning on these monies not subject to income tax or capital gains tax when we are drawing a pension from the superannuation fund. Accordingly, the earnings on these investments should accumulate in value at a greater rate than if they were held outside of super.
Whilst many readers do not have $1.6 million in their member account in their superannuation fund, what we are noticing is that, investors are receiving their inheritance late in life. That is, we could be in our 60’s or 70’s when the inheritance is received and based on the above it may not be eligible to be contributed to the superannuation fund, and hence, the earning will be subject to tax at our marginal tax rate and subject to capital gains tax.
Another example is where this strategy may not be able to be implemented is where we downsize our family home to a smaller unit or townhouse or relocate outside of one of the capital cities. In this event, the surplus cash from the proceeds of the family home will not be able to be contributed to superannuation.
An investment alternative that could be considered, in these circumstances, is an investment bond. An investment bond is like a tax-paid managed fund. Investors choose from a range of investment options, depending on their goals. These range from growth portfolios which typically include more equities, to defensive portfolios which usually invest in cash and fixed interest.
An investment bond is a tax-paid investment vehicle, because the earnings from the underlying investment portfolio are taxed at the company rate of 30 per cent within the bond structure. Investors do not receive distributions as they are re-invested, and do not therefore need to declare the earnings from the bond in their personal tax returns. In the case of investment portfolios which contain equities, the tax rate may be further reduced by franking credits.
Funds can be withdrawn at any time, however, if they are left in the investment bond structure for 10 years, the entire proceeds of the bond (original investment, additional contributions and earnings) are tax paid. The investor does not need to include them in their tax return, and they can be distributed as a lump sum, or as a tax-paid income over time. And because an investment bond is in fact an insurance policy, with a life insured (this can be the same person as the bond owner), on the death of the life insured, the beneficiary of the bond will receive all proceeds of the bond tax free, regardless of how long the bond has been held.
Should you have any queries in relation to Investment Bonds please feel free to contact Peter Quinn by submitting an online enquiry or calling us on +61 2 9580 9166 to book an obligation free appointment.
The information in this document does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it. It is important that your personal circumstances are taken into account before making any financial decision and it is recommended that you seek assistance from your financial adviser.