It is very unlikely that any one person can control all of life’s events, but smart investors can use Imputation Bonds to be prepared for some of the major ones.
An Imputation Bond can be used to build a lump sum endowment for many special-purpose life-event objectives. Such endowments can be structured to be available to someone at a certain age, or perhaps in the event of death.
Bonds are also used to fund unknown life-event contingencies (such as sickness or for medical expenses) or even as a nest-egg to draw down against over a future period.
While the list of life events can be extensive, here are some of the better known strategies employed by savvy investors to meet life’s expected and occasionally unexpected financial challenges:
Sinking fund strategies
Imputation Bonds are ideal for accumulating lump sums to meet future financial obligations, such as use as a sinking fund to discharge borrowings.
Early mortgage payout
A rule of financial planning is to pay off your home mortgage as a first priority. You can address similar ends by using your Imputation Bond as a sinking fund designed to discharge your mortgage on a pre-set future date, without losing control or access to your funds if your plans change.
Discharging geared investment plans
If you have a geared investment property, your financial plan might be to use your Bond’s maturity proceeds to pay off the investment loan in one lump sum payment.
Margin lending provision
Another strategy is to use your Bond as a back-up provision for unexpected calls on a margin lending facility or perhaps even to pay it out at some planned future date.
Funding education with imputation bonds
Rather than using it for education funding the Imputation Bond’s flexible ownership options can also facilitate specific education funding objectives.
Trustee ownership for education purposes
An Imputation Bond can be established by a Bond Owner or a trustee for one or multiple named “education” beneficiaries of a privately established trust. At the time of the required funding, the “trustee” Bond Owner can simply control draw-downs to meet education expenses.
Importantly, because a Bond does not produce distributable or assessable income from year to year, there are no income tax or CGT implications for trusts holding Bonds during the accumulation phase.
Transferring a bond for education funding
Another education funding option is to set up an Imputation Bond in your name and control its accumulation to a particular level, and then transfer the Bond by assignment, without a tax event taking place, to your intended child at the time education expenses commence. They can then take full advantage of the 30% tax offset when withdrawing.
Overcoming children’s high taxation
From a tax planning perspective, ownership of an Imputation Bond by a child is a way of overcoming punitive tax treatment applying to children.
Generally, children under 18 years of age are subject to high income tax rates of (up to a 66 per cent MTR) on taxable investment income earned over a minimal threshold, usually $416. In effect, children are taxed like high income earners.
In the Bond’s accumulation phase, its earnings do not count as the taxable income of a child. By withdrawing or making a series of part-withdrawals after a child turns 18, the Portfolio Tax can in effect be recouped and replaced with little or no tax in the recipient’s hands.
Other financial planning options:
- Use an Imputation Bond as a dedicated fund to pay a person’s health insurance from or at a particular future date, or as your own private health “insurance” contingency fund.
- Use an Imputation Bond as a provision for retirement accommodation costs; for an overseas trip; or for funeral expenses.
- Use an Imputation Bond for financial provisioning for a child or a loved one with a physical or intellectual disability; or as a dedicated fund to meet costs of financially maintaining children, such as in circumstances of a divorce.
Media enquiries
Richard Atkinson
Head of IFA Product and Relationships
Austock Life Limited
03 8601 2095
0417 541 897
RAtkinson[at]austock.com
www.austocklife.com