Mastering the Art of Tax-Efficient Investing: The Power of Education Bonds
Mastering the Art of Tax-Efficient Investing: The Power of Education Bonds
In a world where financial planning is becoming increasingly critical, Australians are seeking answers to navigate the complex tax landscape. With both state and federal governments eyeing ways to boost their revenue, it's crucial to explore tax-efficient investment options.
Many individuals, particularly the self-employed or those in the highest tax bracket, are concerned about the prospect of paying a staggering 47 percent in taxes while taking additional financial risks to secure their family's future. Additionally, the proposed Division 296 tax on superannuation balances exceeding $3 million is prompting more Australians to rethink their financial strategies and for the first time consider alternatives to superannuation.
The Solution: Education Bonds
One promising solution that's gaining traction is the Education Bond.
But who stands to benefit the most from this versatile investment tool?
Suited for Generational Wealth Transfer:
Money passed down from one generation to the next can make the educational journey of children and grandchildren smoother. Grandparents can use Education Bonds to set up dedicated education savings plans, ensuring their loved ones' futures are secure. It also offers a low-maintenance and cost-effective alternative to family trust structures and enables confidential wealth transfers, both before and after their passing.
Building a Foundation for Children's Education:
Parents and prospective parents can use Education Bonds to lay the groundwork for their children's lifelong education. By setting up dedicated education savings plans and making regular contributions, they can build a financial safety net for their children's future education expenses.
Ideal for Various Financial Goals:
Education Bonds aren't limited to education funding alone. They provide an efficient tax solution for:
- Middle to high marginal tax rate payers: Earnings are taxed at a maximum of 30 percent, often lower than your marginal tax rate. You pay income tax while it's invested, eliminating the need to report income as you go. Depending on usage and timing, withdrawals may even be tax-free.
- Those seeking an alternative to superannuation: Education Bonds offer greater liquidity and estate planning benefits compared to superannuation, especially if you've reached your super caps.
- Those planning estate and wealth transfers: Transfer your wealth efficiently by making a bond death nomination or arranging a future transfer to bypass the complexities of wills and estates, and potential death benefit tax within superannuation.
The Flexibility Advantage:
One of the standout features of Education Bonds is their flexibility.
You're not locked into a rigid investment plan:
- You can add or remove beneficiaries at any time.
- It provides a 'will-like' inheritance for loved ones, funding education costs even after your passing.
- You can appoint a Bond Guardian(s) to ensure your wishes are carried out in the event of your death or incapacity.
Unique Tax Benefits:
Education Bonds offer a range of tax benefits that make them a smart choice for tax-effective investing:
- Education Tax Benefit: When making an Educational Benefit Claim, you'll enjoy an additional $30 for every $70 withdrawn from your investment earnings.
- Tax-Paid Investing: The provider pays the tax on your bonds' ongoing investment earnings, not you.
- Tax-Free Components: Access capital tax-free at any time for any purpose, whether for educational or non-educational purposes.
- No Personal Taxable Income or CGT: Education Bonds don't add to the bond owner's personal taxable income, and they don't involve capital gains tax implications.
Flexible Investment Options:
Education Bonds offer a diverse investment menu, allowing you to invest tax-effectively in underlying managed funds managed by leading Australian and international investment managers. You have the freedom to modify your investment mix as needed, adapting to changing market conditions and your individual circumstances without incurring personal tax or capital gains tax consequences.
Discover Family Education Bond:
There are a plethora of providers, with some providers offering unique Family Education Bond, allowing you to appoint up to 10 beneficiaries under a single tax-effective, flexible bond.
Unlock Your Financial Potential:
Education Bonds are a powerful tool that can help you save and invest tax-efficiently for education and other financial goals. With full control of your investment, you can confidently plan for the future, whether for educational purposes or personal use.
Don't miss out on the numerous benefits that Education Bonds offer for wealth accumulation, education funding, and wealth transfer certainty. Contact us today to explore how Education Bonds can be tailored to your financial goals and secure your family's financial future with confidence. Your financial peace of mind deserves nothing less.
Education bonds in practice:
Parents looking to save for the future cost of education for their family.
Meet Tim & Lara
Tim and Lara are both 38 years old and have two children aged 3, and 5, with plans for a third child in the next three years. They value education and see it as the doorway to their children’s future success in life. They want to send their children to Government Primary and Catholic secondary schools.
Tim has been offered the opportunity to fast-track his career by taking up a secondment in Vietnam – the family are planning to move in the next 12 months. Lara has returned to work and is also completing a masters degree part-time.
Their average marginal tax rate is 45% and they have recently sold an investment property leaving $250,000 to invest.
They are seeking financial advice to create a plan to fund their children’s long-term education as they intend to return to Australia after the two-year secondment.
Tim & Lara’s Requirements
• ~$130,000 per child: (Based on a child starting from year 7)
• Location flexibility: They would like the option to continue with their education plan when they relocate overseas, including Lara’s study.
How an Education Bond can Help?
Flexibility
Tim and Lara can fund their own education expenses or withdraw money for other family needs, such as a holiday, with no tax to be reported or paid. If they have a third child, they can add them to the Education Bond as an additional beneficiary without having to commence a new bond.
Savings Escalator
The couple can continue a savings plan to help accumulate wealth on a monthly basis. They can also use the Savings Escalator feature which automatically increases the savings plan yearly to match the increasing school fees they will face by the time their children enter secondary schooling.
Access to the Education Tax Benefit
Payments for eligible education expenses will benefit from the Education Tax Benefit.
The benefit is equal to $30 for every $70 withdrawn from the bond earnings when used for education purposes.
Education claims
Tim and Lara can make an Education Benefit Claim, as both Australian and international education expenses are eligible, for adults as well as children.
Tax-paid benefits
For bond owners with middle-to-high marginal tax rates such as Tim and Lara, tax paid investments can have a valuable ‘arbitrage’ benefit. This is because the rates that the providers pay on their bond are generally lower than the current tax rate that Tim and Lara pay. Lower tax rates mean higher unit prices and improved performance of Tim and Lara’s bond.
Education bonds in practice:
Grandparent looking to financially support her family
Meet Helen.
Helen is in her golden years and wants to leave a $450,000 inheritance to help fund her three grandchildren’s education (and any further grandchildren) as a priority, as well as helping them towards a deposit on their first homes.
Helen’s Financial Adviser has calculated that for each of the current three grandchildren to attend private school would cost ~$280,000 each. Helen does not need income, but may like to access some of the investment for personal use without triggering a tax event. She wants the education funding to remain in place to meet the needs of her grandchildren when she passes away.
Helen’s Requirement
• Personal use: While Helen does need income, she may like to access some cash for personal use at any time, without triggering a tax event.
• Long-term planning: Should Helen pass away, she wants her two daughters, to oversee her intentions for her grandchildren’s education funding and future wealth transfer.
How an education bond can help?
Tax-paid investment
Education Bonds are tax-paid investments, meaning throughout the entire bond term of Helen’s investment, the provider pays the tax on the bond’s ongoing investment earnings.
The advantage here is, while the bond grows in its tax-paid environment, Helen does not have to be
concerned with tax reporting and paying tax (or CGT) on ongoing earnings.
Flexibility
Helen can add more grandchildren to the one education bond without setting up a new bond, without any tax issues. She can also withdraw money for her personal needs as they arise at any time without creating a CGT event.
Certainty of wealth transfer
The final bond balance can be transferred to Helen’s grandchildren at a nominated date, tax-free. This strategy provides confidentiality (outside her will) and ensures the balance goes to the intended beneficiaries without being contested.
Education Tax Benefit
Whenever there is an Education Benefit Claim, the provider will automatically include the valuable Education Tax Benefit. So, should Helen process an education school fee for $10,000 for one of her grandchildren, a $3,000 education tax benefit will be generated. This means they will receive $10,000, yet the earnings component of the bond only reduces by $7,000.
Favourable tax rates
If Helen dies before a grandchild turns 18, the Education Bond will shift to testamentary status. This means that any amounts received as an Education Benefit may be subject to more favourable adult tax rates.
Expansive investment menu
Helen can adjust her investment at any time to better match her risk profile, given her age and continued market fluctuations.