Make Insurance Bonds Work Smarter

Sun Herald

Sunday November 4, 2007

George Cochrane

It's important to make sure your investment brings a good return, writes George Cochrane.

I WILL inherit some managed investment bonds purchased in February 1984. The investment value at purchase was $20,000. They are now worth about $80,000. Should I sell or hold the bonds? What are the tax implications? E.M.C.

I think you will find the investment is a single-premium, investment-only product marketed as insurance bonds, and taxed at 30percent on their annual income.

As your bonds are more than 10 years old, withdrawals are untaxed. Whether to keep them or not depends on how they are performing compared to similar portfolios in super funds (taxed at 15percent) or trusts (untaxed), the latter two possibly being subject to tax on withdrawal. Insurance bonds are not now actively marketed and their results have not been at the top of the heap, even accounting for tax differences.

The money may be better off in a well-managed super fund or equity trust, otherwise let them continue to grow.

Pay house debt first

MY husband and I have recently made $110,000 from selling some investment properties. We owe $440,000 on our home. We plan to leave the proceeds in our offset account, as I have heard we won't have to pay capital gains tax until March 2009 (the properties were sold in mid- 2007). We have about $100,000 each in super but no other investments or debts. My husband is 49 and I am 46. Is the mortgage offset the most efficient use of this money? D.B.

I love mortgage offsets as a tax-effective means of reducing the interest payable on the underlying loan. They are most useful when you may want to redraw the money for a further property purchase. However, you have a hefty home loan and such loans represent a risk should one of you become injured or ill.

You should be trying to pay this off as soon as possible while also working at tripling, or quadrupling, your $200,000 in super by the time you retire.

Lessen the tax load

I AM 72, working full-time and salary sacrificing into my super. My self-managed super fund balance is $200,000 in undeducted or tax-free [contributions] and $400,000 in deducted or taxable. If I withdraw $150,000, what are the balances in each portion? Can the $150,000 only be withdrawn from the taxable portion (though tax-free to me)? In my estate planning, all my beneficiaries will be non-dependents. I do not intend to withdraw tax-free monies and distribute now. How can I help them to reduce the 16.5percent tax burden? M.N.

You can no longer withdraw individual components and any withdrawal will contain a ratio of tax-free:taxable in the ratio of 200:400 or 1:2.

If you withdraw $150,000 a year, it will contain a $100,000 taxable component but will be tax free as you are over 60. Until you turn 75, you can recontribute $150,000 a year as a non-concessional tax-free component in addition to your salary sacrifices.

I suggest placing these non-concessional contributions into a separate fund so that they are not counted as the one interest within the fund. Remember, while in the accumulation stage, the tax-free component is a fixed dollar amount and any growth falls into the taxable component. It only becomes a fixed ratio once you start receiving a pension.

If you have a question for George Cochrane send it to Personal Investment, PO Box 3001, Tamarama, NSW, 2026. Helplines: bank ombudsman 1300 780 808; pensions 132800.

© 2007 Sun Herald

Back to News Index | Back to Home