STRATEGY 1
ALTERNATIVE
TO SUPER.
ADVISER USE ONLY
CommInsure Investment Growth Bond Strategy Series
Issued: November 2015
AT A GLANCE
This technical paper focuses on the different situations
where insurance bonds may be more beneficial for your
clients than contributing to super. Specifically, this document
provides information on insurance bonds and their:
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Absence of contribution rules
Access to capital
Estate planning features
Ability to provide a potentially tax effective income stream.
Ask advisers why they recommend insurance bonds and most
will talk about the tax benefits for high income earners. However,
insurance bonds also provide an alternative to superannuation.
In fact this strategy paper highlights situations where an insurance
bond can be more appropriate than superannuation for your clients.
Contribution rules
Insurance bonds are not subject to the same contribution
restrictions as superannuation such as contribution caps and work
tests. This flexibility can allow clients who would otherwise be
unable to contribute to superannuation, to move their funds into
the flexible insurance bond environment.
Contribution caps
Contribution caps limit both non-concessional and concessional
superannuation contributions. For clients who have already
contributed up to their contribution caps, contributing to an
insurance bond can be an effective alternative.
For example, clients who have already contributed up to their
non-concessional contribution cap of $180,000 per financial
year or up to $540,000 under the 3 year bring forward provisions
are unable to make any further non-concessional contributions
without incurring additional taxation. Clients in this situation could
contribute to an insurance bond.
Work test
Clients may be unable to contribute to superannuation once they
reach age 65 without satisfying the work test.
Generally, for clients aged 65 to 74, they must meet a work
test prior to making a superannuation contribution.1 The
superannuation work test is 40 hours in 30 consecutive days in the
financial year they contribute.
1 Excludes mandated employer contributions.
2 Includes Medicare Levy of 2%pa
For clients who are unable to contribute to super, insurance bonds
can be an effective alternative.
Access to capital at any time
In addition, if you invest in an insurance bond your investment
is not subject to preservation rules so your clients always
have access to their capital and can withdraw part or all of the
investment at any time. Insurance bonds are generally tax free after
10 years, investors can withdraw the proceeds earlier and receive
a 30% tax offset on the assessable profit portion of the withdrawal
(section 160AAB ITAA36).
Hassle free estate planning
Taxation upon death is a large consideration for advisers, clients
and beneficiaries, particularly when clients have non-dependant
children as beneficiaries. In the super environment, death benefits
paid to non-dependants risk tax of up to 32%2 of the untaxed
element of the Taxable component. Insurance bonds offer an
alternative in these situations as they allow proceeds to be paid to
any beneficiary (including non-dependants) tax free.
Leaving the potential tax benefits aside, insurance bonds can also
be used in a number of ways to solve estate-planning problems.
Clients can nominate more than one beneficiary and stipulate the
percentage that each will receive. When a beneficiary is nominated,
the proceeds will not be subject to challenges to the client’s estate,
as they will not form part of the estate assets (except in NSW).
Complex family situations can also be accommodated.
For clients with children with a marriage at risk, insurance bonds
can provide a level of asset protection for the children. Upon death
of the client (i.e. the parent), bond proceeds can be paid to their
estate and included in the creation of a discretionary trust in their
Will for the benefit of children.
In other situations where the client only wants to provide for
children or grandchildren, the bonds can be set up as a child
advancement policy. Ownership would automatically transfer to the
child or grandchild at a stipulated age (from 10 to 25 years of age),
without capital gains tax consequences.
Flexible income stream
For clients that withdraw before the 10-year period, all or part of
the profit portion or investment earnings may need to be included
in their assessable income. Tax offsets may also apply: a 30% tax
offset may be applied against any tax payable on the withdrawal
amount or any other tax liability on other income.
The amount of profit included in the client’s assessable income
depends on when they make a withdrawal. The following rules
apply when a client makes a withdrawal (assuming that the client
has not breached the 125% premium rule1):
•• within eight years, all of the profit is included as
assessable income
•• during the ninth year, two-thirds of the profit is included
as assessable income
•• during the 10th year, one-third of the profit is included
as assessable income
•• after the 10th year, none of the profit is subject to personal tax.
The tax treatment of withdrawals can make an insurance bond
a potentially tax effective income stream.
Redundancies
Helping your clients decide the most tax effective use of
redundancy payments can be a challenge. Vehicles such as
an insurance bond might be an appropriate product to consider.
Superannuation may not be appropriate as preservation rules
limit access to capital and clients may require access depending
on future cash flow requirements.
Where clients do contribute to superannuation, the amount
that can be contributed is limited by the contribution caps.
Strategies
Ted, 45
Ted has just been made redundant as CEO after twelve
years of service and received a redundancy payment
of $968,472. The tax-free portion of his redundancy
payment amounts to $68,472 ($9,780 base limit plus $4,891
for each complete year of service). The balance of his
redundancy payment, $900,000, all of which is taxable
component (untaxed element) will be taxed at 32% on the
first $195,000 and 49%1 on the remaining balance. This
leaves Ted with a net payment of $560,622. In 2014/15,
Ted maximised his super contributions by making $30,000
of concessional and $540,000 of non-concessional
contributions to his super fund. He cannot make any more
non-concessional contributions for three years.
Ted expects to find a new executive position, but wants to
know where he can invest his money in a tax-effective way.
Following the advice of his financial adviser, Ted invests the
$560,622 in a CommInsure Investment Growth Bond (IGB),
with the aim of drip-feeding
these funds into super. This may
potentially be a tax-effective
investment if, as Ted expects,
he will shortly be employed with
taxable income putting him in
the highest marginal tax rate.
As an alternative, Ted, who is at
least 20 years from retirement,
has the option of setting up a gearing strategy, using his
IGB account balance as security to borrow in order to
invest in shares or other income-producing investments
and being able to deduct interest on his investment loan.
1 Includes Medicare Levy of 2%pa and Temporary Budget Repair Levy of 2%pa
Tina, 67
Tina is a self-funded retiree on a marginal tax rate of 39%1,
who can no longer make contributions to super by satisfying
the work test. She lives in the family home in Sydney, and
inherited a holiday home on the north coast of New South
Wales following the death of her husband six months ago.
The property is valued at $650,000, and Tina would like
to sell this property and invest the funds in a tax effective
way. After discussing her situation with her financial
adviser, Tina sells the holiday home and invests in a
CommInsure Investment Growth Bond (IGB). The internal
tax rate within the Bond is 30%, so this investment may
benefit Tina in view of her 39%1 marginal tax rate. Tina
can also supplement her current super income if required
by making progressive partial withdrawals from her IGB
investment. She can control the frequency and amount
of withdrawals. Each withdrawal would consist of capital
(with no tax implications) and an earnings figure. The
1 Refer to the PDS for details on the 125% Rule.
earnings figure may be split
between assessable and
non-assessable components
(depending on the tax year
in which the withdrawal
took place). The assessable
earnings component is taxed
at her marginal tax rate and
is also eligible for a 30% tax
rebate (offset).
1 Includes Medicare Levy of 2%pa
Carol, 60
Carol has just retired, and has $880,000 in super (100%
Taxable component). Carol has had a history of bad health
due to a congenital heart condition. She is divorced and has
three non-dependent adult children. If Carol dies and leaves
her super to her adult children, the effective death benefit
would be reduced by tax of $149,600 (17%1 of the lump
sum). As Carol is now 60, she can withdraw the entire lump
sum tax free and distribute portions to her adult children.
A better strategy may be to withdraw her super and
recontribute $540,000, using the bring forward rule, which
allows people under 65 to effectively bring forward two
years worth of non-concessional contributions. Carol can
then commence an income stream. The balance of $340,000
could then be invested in a CommInsure Investment Growth
Bond (IGB). Although the earnings on this investment would
be taxed at a rate of 30%, any payments to her nominated
beneficiaries on Carol’s death
would be completely tax free
(as would the balance of her
pension account).
Finally, in three years time if
she so chooses, she could
contribute the value of the IGB
(up to $540,000) back into super.
The assessable earnings
component of the withdrawal
would be assessable at her marginal
tax rate and is also eligible for a 30% tax offset (rebate).
1 Includes Medicare Levy of 2%pa
Security and Assignment
Fees
•• Unlike superannuation, insurance bonds can be used as
•• No establishment, withdrawal, termination or switching fees apply
•• Only a management fee applies for each investment option
•• Adviser Service Fee arrangements can be established.
security for borrowings – effectively allowing them to form part
of a gearing strategy.
•• Bonds can also be assigned to other people. Where this occurs
for no consideration (for example where an asset is gifted)
there are no tax consequences for either party and the 10 year
investment term is not disturbed.
CommInsure Investment Growth Bond
CommInsure’s Investment Growth Bond offers competitive
features and product guarantees including:
•• Range of multi-sector and single sector investment options,
four of which have guarantees designed to provide certainty
around the minimum value of the client’s holdings in that
investment option.
•• A death benefit guarantee which provides certainty on the
minimum amount that will be paid on the death of the last
surviving life insured. This guarantee pays back the client’s
contributions to the bond (less withdrawals and fees) if this
is higher than the cash value of the bond.
•• Access funds at any time, with a minimum withdrawal
Summary
This strategy paper illustrates a variety of situations where
insurance bonds can provide a better alternative for your clients
than contributing to super. Although insurance bonds are
traditionally used to assist high income earners to potentially
reduce tax, this paper shows that clients limited by super
contribution limits can also benefit. While super obviously has its
place, insurance bonds can often be used by clients in a variety
of situations to spread client risk in a balanced portfolio with the
added benefit of potentially reducing tax.
Awards
For seven consecutive years, CommInsure’s Investment Growth
Bond has been recognised as number one in the market by winning
AFA and Plan for Life’s ‘Investment Bond of the Year’ award.
Refer to the PDS for more details.
of $1,000 ($500 for automatic withdrawals).
For more information please contact our InsuranceTech
team on 1800 761 067.
21718/301015 CIL883
AFA Investment Bond Award Winner 2014
Important information. This brochure was prepared by CommInsure, a registered business name of The Colonial Mutual Life Assurance Society Limited ABN 12 004 021 809 AFSL 235035 (CMLA), a wholly
owned but non–guaranteed subsidiary of the Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945 (the Group). It is for use by the Group employees and financial advisers only and is not to be issued,
reproduced in whole or in part, or made available to members of the public. The taxation information, social security information and examples are of a general nature only and should not be regarded as specific advice.
Case studies in this brochure are for illustrative purposes only. Certain assumptions are made and explained in each case study. Information in this brochure is based on the continuation of present taxation laws,
superannuation laws, social security laws, rulings and their interpretation as at the issue date of this brochure. Advisers should refer to the relevant life company policy documents for further clarification.
CommInsure is not a registered tax (financial) adviser under the Tax Agent Services Act 2009 and you should seek tax advice from a registered tax agent or a registered tax (financial) adviser if you intent to rely on this
information to satisfy the liabilities or obligations or claim entitlements that arise, or could arise, under a taxation law.