Division 296 signals rising policy risk, prompting advisers to diversify structures and reduce reliance on any single tax environment.

Looking beyond traditional forms of risk

Chat about risk with any adviser, and it’s likely to cover some predictable territory: Market risk. Concentration risk. Sequencing risk. Inflation. Longevity. These are, after all, the foundation of almost every client conversation, and minimising their impact is the basis of almost every financial plan.

But there’s another risk that is becoming harder to ignore, and it’s not coming from markets.

It’s coming from governments.

Over the past decade, superannuation alone has been subject to a near-constant cycle of reform: contribution caps, transfer balance caps, Division 293, and the recently confirmed Division 296 tax are just some of the examples. While each of these changes may have seemed incremental in isolation, collectively they have significantly reshaped the long-term outcomes from superannuation investments, and the effectiveness of strategies designed to optimise those outcomes.

There is a subtle but undeniable tension emerging. As highlighted in recent Generation Life research^[1]:

“Our retirement system is built for long-term horizons yet repeatedly shaped by policy measures introduced across successive election cycles”.

This year alone, in addition to the application of Division 296 to super balances over $3m, the Federal Government is also mulling changes to the Capital Gains Tax (CGT) discount^[2], impacting the effectiveness of various strategies, including property investing.

These are unlikely to be isolated events, regardless of who is in government.

In such an environment, mitigating risk therefore means looking beyond asset diversification. It means also diversifying structures and strategies to make portfolios resilient in the face of almost inevitable change. And the adviser’s role in this is increasingly to interpret, not just inform – translating shifting policy settings into clear strategic implications and helping clients make decisions with confidence, despite the uncertainty.

In this article, we explore how Division 296 and other emerging policy changes create risks for clients, why structural diversification is a crucial mitigant of such risks, and how investment bonds are one of the structures advisers are increasingly utilising to achieve this diversification.

Division 296: more than just a tax change

Few superannuation changes have seemed so convoluted as the Division 296 tax. First proposed in 2023^[3] – and eventually becoming law in 2026 – the original name of the reform (‘Better Targeted Superannuation Concessions’) provides a useful insight into both the possibility, and focus, of future changes. But whilst much of the associated narrative surrounded the specifics of the tax, the more powerful signal lies in what Division 296 might represent longer term.

While superannuation changes are nothing new, for much of its history these changes have been applied on a relatively consistent and uniform basis across all members, with the aim of encouraging the accumulation of retirement savings across the population, regardless of wealth or income. That began to change with Division 293, which introduced additional tax on concessional contributions for higher income earners^[4].

Division 296 extends that shift even further, meaning superannuation is no longer operating as a single concessional regime.

Under Division 296, an additional tax of 15% now applies to earnings on balances above $3 million, with a further 10% (making a total of 40%) applying to balances in excess of $10m^[5]. This change sees super increasingly structured as a tiered system, where investment outcomes vary depending on the balance size and income of members.

But this is about more than the actual rates of tax. The introduction of thresholds, differential rates and targeted settings reflects a system that is becoming more complex, more segmented, and more susceptible to ‘adjustment’ over time. The scope and limits of Division 296 might be set for today, but what we now have in place is a framework through which even more tiering of benefits can occur.

For advisers, this has two implications.

Firstly, outcomes for clients – especially HNW – are likely to be increasingly exposed to policy/regulatory risk. Changes to thresholds, rates or definitions can materially alter long-term outcomes from particular strategies and structures, especially for clients operating close to relevant limits.

Secondly and more fundamentally, Division 296 spotlights a different type of concentration risk: overexposure to a single tax environment – a risk exacerbated where that environment is subject to increasing flux.

Policy risk is expanding – beyond super

Australia’s shifting legislative environment is undoubtedly a major determinant of after-tax outcomes for investors. But whilst many of the headlines focus – understandably – on changes to super, in reality there are many areas of wealth that remain under a constant spectre of regulatory intervention and rule changes.

The recently proposed lowering of the capital gains tax (CGT) discount is a case in point. Whilst the quantum or form of this reduction was not known at the time of publishing this article, what is clear is that any reduction in the discount would directly alter the after-tax return profile of geared investment strategies, involving both property and equities. Strategies that rely on the interaction between leverage and concessional CGT treatment would therefore need to be reassessed as a matter of priority.

At the same time, property investors are increasingly exposed to state-based taxes and regulations. Land tax regimes, vacancy taxes, and short-stay accommodation levies are now in place across most of the country, usually with very little alignment between jurisdictions. For clients with concentrated exposure to a single state or asset class, these changes can materially affect holding costs and long-term returns.

Family trust structures are also coming under increased scrutiny. Recent ATO activity^[6] targeting what it describes as “excessive” income splitting highlights a growing focus on how trusts are being used in practice, particularly among higher-income individuals. While this does not yet represent a wholesale change to trust law, it reinforces a broader point: policy risk is not limited to legislative reform. It also arises through changes in interpretation, enforcement and administrative focus, which can materially alter how existing structures are treated over time.

Changes to franking credits were taken to the 2019 election – unsuccessfully – by Bill Shorten, and it’s reasonable to assume a more strongly positioned government might propose some sort of change again in the future.

And of course, superannuation itself is not immune to further adjustment. While the tax-free status of pension phase investment earnings remains intact, it has already been subject to one limitation, via the Transfer Balance Cap. Over a 30 to 40-year investment horizon, it would be naïve to assume that the current settings will remain unchanged, particularly as fiscal pressures and population demographics continue to evolve.

For advisers, this means the challenge is not just about optimising client portfolios within the current rules, it is about interpreting how those rules may evolve, interact, and compound over time, and the potential client impact. In effect it means acting as a ‘Chief Interpretation Officer’.

Structural diversification is an important risk mitigant

Discretionary trusts, private companies, self-managed super funds, and investment-bond structures each deliver different regulatory, tax, and succession characteristics. Diversifying across these vehicles becomes a critical tool in reducing reliance on any single policy regime, and in building strategies that are more resilient to future changes.

A strong body of evidence supports the importance of structural diversification.

FT Adviser^[7] described diversification across tax wrappers as “essential for managing liquidity and policy uncertainty”, while a 2025 study^[8] by Krieg & Li provides direct evidence that diverse tax-planning strategies materially reduce exposure to policy and compliance risk. Analysing more than 4,000 firms, they found that those with more diversified tax strategies experienced lower volatility in effective tax rates, indicating reduced exposure to tax-related risk. While corporate in scope, the findings translate directly to a high-net-worth client context.

Investment bonds – outsmarting the government

If structural diversification is the response to rising policy risk, investment bonds are a clear example of how that principle is being applied in practice.

Unlike superannuation, investment bonds sit outside the super system and are not subject to contribution caps, preservation rules or balance thresholds. This distinction has become increasingly relevant as Division 296 introduces higher and more targeted taxation within super.

The appeal of investment bonds lies not simply in the opportunity to pay lower tax on earnings, but exposure to a different tax regime altogether (one that has remained materially unchanged for decades).

While the headline tax rate within an investment bond is 30%, the effective rate can be materially lower depending on the underlying assets. Where portfolios generate franked dividend income, internal tax rates can fall into the low teens, and in some cases, closer to 10–11%^[9].

Compare this with the changing tax profile of superannuation. For balances above $3 million, earnings may now be taxed at up to 30%, and up to 40% for balances exceeding $10 million.

Over longer holding periods, these differences can become quite pronounced. Furthermore, subject to the 10-year rule, withdrawals from investment bonds can be received on a tax-paid basis, meaning that all capital growth and income within the structure can effectively become tax-free in the hands of the bond’s owner (or beneficiary).

As one adviser observed^[10], investment bonds are a structural loophole that can be used to “outsmart the government” on the new tax.

Importantly however, their role is not to replace superannuation, but to complement it.

Used alongside super, trusts and companies, investment bonds allow advisers to allocate capital across different tax environments, reducing reliance on any single set of rules, and introducing greater flexibility into long-term planning.

Structural diversification builds confidence and trust

In the same way that asset diversification gives investors more confidence in their ability to withstand market turbulence, so too is there an emotional dividend from structural diversification.

Evidence from the Oxford Business School and Centre for Business Taxation¹¹ suggests that investor behaviour is shaped not just by the level of tax, but by the predictability of the tax system itself. Where that predictability weakens, so too does the willingness to commit to long-term strategies. At an individual level, stability facilitates more commitment to a strategy.

In Australia, research¹² from Generation Life highlights that while overall confidence in the retirement system remains high, around two-thirds of investors believe the rules change too often and are difficult to follow. This uncertainty can manifest as a lack of confidence, and a lack of belief, which in turn can lead to reactive, emotionally charged decision making.

That same research found that confidence is now the #1 value HNW clients seek from their adviser^[13].

Policy risk is not just a structural challenge, but a behavioural one. It influences not only what strategies are optimal, but whether clients are willing to adopt and persist with them.

Practical implications for advisers

For advisers, the implications are both structural and behavioural.

At a structural level, this means identifying where portfolios are concentrated within a single tax regime and deliberately diversifying across multiple tax and ownership structures to mitigate the impact of policy risk.

At a behavioural level, it means recognising that client outcomes depend not just on strategy design, but on confidence in that strategy over time. This is where the adviser’s role as an interpreter becomes critical, translating complexity into clarity, explaining exposures to different regimes, and helping clients maintain confidence in strategies that are designed to operate through changing regulations.

Conclusion

The Division 296 superannuation tax has rightly attracted headlines, being at the centre of a debate around superannuation concessions for high income, high balance investors. In anticipation of its implementation in July 2026, advisers have already been working with impacted clients, allocating away from super into a variety of alternative structures and products, including investment bonds¹⁴.

But the real takeaway is less to do with specific tax rates, and more to do with the risks of being exposed to single tax regimes in an environment of regulatory and policy uncertainty.

In the face of such uncertainty, advisers are increasingly recognising the importance of structural diversification. By allocating client portfolios across multiple tax environments – including superannuation, trusts, companies and investment bonds – advisers are able to achieve a balance of efficiency, flexibility and resilience. In an environment where regulation and tax rates continue to evolve, this approach represents a powerful way to manage risk and support more consistent long-term outcomes for clients.

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References:
[1] 2024/26 Navigating Uncertainty Report, Generation Life.
[2] https://www.thesenior.com.au/story/9205607/jim-chalmers-warns-of-hard-decisions-on-negative-gearing-cgt/
[3] https://www.mercer.com/en-au/insights/mercer-financial-advice/div296-update/
[4] https://www.vanguard.com.au/super/learn/super-tax/division-293-tax
[5] https://www.superguide.com.au/super-booster/super-tax-accounts-3-million
[6] https://www.afr.com/wealth/tax/ato-targets-high-earners-over-excessive-income-splitting-20251126-p5ninw
[7] https://www.ftadviser.com/content/3d792b3c-f79b-5b07-aa05-296ad6c9ef51
[8] https://www.sciencedirect.com/science/article/pii/S1815566925000372?utm
[9] https://www.afr.com/wealth/superannuation/wealthy-australians-show-how-to-outsmart-new-3m-super-division-296-tax-20260302-p5o6kb
[10] Ibid.
[11] https://www.sciencedirect.com/science/article/abs/pii/S0304405X21001628?via%3Dihub
[12] 2024/26 Navigating Uncertainty Report, Generation Life.
[13] Ibid.
[14] https://www.afr.com/wealth/superannuation/wealthy-australians-show-how-to-outsmart-new-3m-super-division-296-tax-20260302-p5o6kb

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Investment bonds can be integrated into modern estate planning to achieve tax efficiency, control, and asset protection in wealth transfers.

Introduction

Contrary what we are regularly told, the ‘great intergenerational wealth transfer’ is not coming. It’s already well underway.

The enormity of this ‘handing down of wealth’ from older to younger generations was initially put in the spotlight by a Productivity Commission report, published in 2021. That report^[1] estimated around $1.5 trillion had already been transferred by Australians over the previous 20 years, and that over the coming 30 years – to 2050 – that figure was expected to top $3.5 trillion.

Since 2021, asset values, especially house prices, have continued to surge, so much so that estimates by stockbroker JB Were suggest the eventual amount transferred by that date will be closer to $5.4 trillion^[2], a truly astonishing amount.

In an ideal world, such transfers would occur efficiently, tax effectively, and in line with the transferrer’s wishes. Sadly however, without expert advice – financial and legal – wealth transfers are becoming increasingly complex and contested, subject to expensive legal disputes from family members who are often embittered and disenfranchised, and falling into tax traps that significantly erode the end value of the amounts inherited or gifted.

Indeed, research by ANZ Private Bank over a 25-year period found about 70 per cent of transfers of intergenerational wealth fail because of dissipating wealth, family conflicts, misaligned family values, delays and bungled execution^[3].

Fortunately, advisers can augment traditional estate planning strategies, which rely on superannuation, wills, and trusts, with innovative solutions which are tax-smart, and far more resistant to any legal contest, giving clients far more peace of mind and certainty that their transferred wealth will end up with the right person, and in the right amount.

Increasingly, advisers are turning to investment bonds as a core pillar of wealth transfer strategies, and in this article, we will explore their structure and operation in more detail. We will also look at how the evolving estate planning landscape is proving the catalyst for their growing popularity.

Estate planning – an increasingly fraught landscape

Readers can be forgiven for interpreting the term ‘estate planning’ in a narrow sense, pigeonholing it as an area that is mainly about wills and other legal instruments, and largely about the transfer of wealth upon death. But estate planning is actually a much broader field, underpinned by a variety of strategies and instruments to transfer wealth and responsibilities between generations, both on and before death.

As such, it is a field that is becoming increasingly complex, and fraught by challenges and conflicts. There are several factors shaping this rapidly changing landscape:

• family structures are evolving, with blended, single parent, and same sex parents becoming more common
• while life expectancies are increasing, so too is the rate of dementia, the need for expensive medical care, and the demand for aged care support
• unaffordable housing, soaring school fees, and general cost of living pressures are seeing increasing instances of family members agitate for early inheritances
• the frequently changing tax rules around superannuation and retirement incomes, for example the proposed Div 296, which require deep technical expertise to successfully navigate.

One big happy family. Not.

According to a UNSW 2024 study, around 30% of children live in families outside the traditional “nuclear” family model. That includes about 12 per cent of children who live in step or blended families^[4].

As families dissolve (due to separation, divorce or death of a partner) and new families are formed, it is not uncommon for wealth transfers to favour the children in the newer family, which in turn sees many aggrieved parties, including children from earlier marriages, and former spouses and de-facto partners.

Lawyers estimate disputes about wills and estates have grown 80% over the last decade^[5]. And, according to one expert, disputes involving blended families now account for about eight in 10 legal actions^[6], which is why strategies to avoid expensive and divisive legal battles need to be recalibrated to reflect changing and complex family relationships.

As court decisions continue to remind us, mechanisms previously thought to be robust and beyond dispute, such as wills, and even binding death benefit nominations in superannuation, are not immune to legal challenge.

And, depending on the state, and the amount being disputed, the success rate of such challenges can be alarmingly high.

In Queensland for example, it is estimated that 77% of challenges to wills are successful^[7]. The Solomon Hollett Lawyers report^[8], which focused on Western Australia, found that challenges pertaining to estates worth less than $600,000 have about a 60 per cent chance of success, climbing to 100 percent for estates over $3 million.

How traditional structures fall short

Traditional estate structures, such as superannuation, family trusts and direct asset holdings, each offer advantages, but they can also create unintended tax, timing and control issues at the point of wealth transfer.

Superannuation, for example, remains one of the most tax-effective vehicles for retirement accumulation, but less so for intergenerational transfer. When benefits are paid to non-tax dependants (such as adult children), the taxable component of the fund can attract up to 17% in death benefits tax, equating to tens, or even hundreds of thousands of dollars of eroded value in larger balances.

Moreover, superannuation death benefits form part of the estate unless a valid binding nomination exists, exposing them to potential challenge or delay. Even binding nominations themselves are still open to challenge on the grounds of capacity, improper execution, ambiguous terms, or failure to comply with fund rules or procedural steps, leading to delays even if a challenge is unsuccessful.

Generation Life’s Not Tomorrow’s Problem research^[9] revealed that outside of super, advised clients are primarily using family trusts as the structure to transfer wealth. While trusts assist in effectively managing access to and the distribution of wealth, there will be times where the structure may not be as tax efficient as some alternatives.

At some point, the use of a discretionary or family trust may not be effective where the trust’s beneficiaries’ personal, taxable income levels are at higher marginal tax rates. The use of child beneficiaries (like grandchildren) may also not be effective, as minors may face penalty tax rates on unearned income.

Where a testamentary trust has been established under a will for estate planning, the practicalities of managing the trust on an ongoing basis may also prove expensive or burdensome for appointed trustees.

Property and direct investments, meanwhile, trigger capital gains tax (CGT) on disposal and will be subject to the granting of probate, which can often delay execution of a will for 6-12 months.

These limitations highlight the value of complementary strategies that enable wealth to be transferred outside the estate while preserving governance and tax efficiency.

Investment bonds can provide such a structure: assets can pass directly to nominated beneficiaries, tax-paid within the bond, and free from probate, CGT, or death benefits tax.

Investment bonds at a glance: the tax-smart wealth vehicle

In simple terms, investment bonds are a form of life insurance policy with an investment component, designed to provide long-term, tax-effective wealth accumulation and transfer.

All investment earnings within the bond are taxed at a maximum rate of 30%, although franking credits, capital gains discounts and underlying fund tax offsets often reduce this effective rate to around 10–15% per annum over time. Some bond issuers, using innovative tax optimisation strategies, can bring this rate down even further.

Once a bond has been held for 10 years, the proceeds, including investment earnings, can be withdrawn on a ‘tax-paid’ basis, meaning no further personal tax is payable by the investor or beneficiaries. After commencement, investors can make additional contributions of up to 125% of the previous year’s amount without resetting the ‘10-year rule’.

Death benefits are tax free at any time, in stark contrast to the tax on superannuation death benefits, which can be as high as 17% if paid to non-dependents.

Bypass and control: why investment bonds are a powerful estate planning tool

Because investment bonds are issued under life insurance law, bond holders can nominate beneficiaries who receive the proceeds directly upon death, bypassing the will/estate entirely. This means the payment is not subject to probate, contest, or public disclosure, and can be made confidentially.

Some providers (for example, Generation Life) also offer a transfer of ownership feature (without triggering any tax burden or resetting the 10-year period), allowing control over when and how beneficiaries can access the investment – for example, releasing funds at a set age or limiting annual withdrawals. These features give clients the ability to protect beneficiaries from poor financial decisions while ensuring their wishes are honoured.

Investment bonds are therefore a cost-effective, tax-efficient, and convenient way to pass on wealth to dependants or other beneficiaries, with minimal administrative complexity. Because they sit outside the estate, investment bonds can distribute proceeds quickly and privately on death, providing certainty and reducing the risk of disputes or delays associated with probate.

For advisers, these options make investment bonds a powerful addition to the estate planning toolkit. They can help address the complexities of blended families, manage gifts to charities or non-family beneficiaries, or balance the needs of multiple generations.

Investment bonds can also offer protection in bankruptcies

As a life insurance policy, investment bonds are generally beyond the reach of creditors (provided they weren’t contributed to while insolvent or set up for the purpose of creditor avoidance). This status offers an additional layer of protection and certainty in wealth transfer scenarios impacted by bankruptcy.

Strategy in action: Wealth transfer case studies

The following case studies demonstrate the flexibility and effectiveness of investment bonds in a variety of wealth transfer scenarios.

Summary

As Australia moves deeper into its largest intergenerational wealth transfer on record, advisers are being called upon to guide families through an increasingly complex and emotionally charged estate planning landscape. Traditional tools such as superannuation, wills and trusts continue to play a central role, but their limitations, including tax inefficiencies and exposure to legal challenge and probate delays, becoming more apparent as family structures evolve. Against this backdrop, clients are looking for solutions that provide both simplicity and certainty.

Investment bonds are now in the spotlight as one of the most versatile structures to meet this demand. Their unique combination of tax efficiency, flexibility, and control allows advisers to design strategies that preserve family harmony, protect capital, and ensure assets pass quickly and privately to intended beneficiaries. Whether used to supplement traditional estate planning, to offset superannuation death benefit tax, or as an alternative to a testamentary trust, they offer a means of transferring wealth that is technically robust and resistant to challenge.

By integrating investment bonds into a broader estate planning and wealth transfer strategy, advisers can help clients navigate the complexity of modern family life, manage tax and legal risks, and create enduring legacies that reflect both financial goals and deeply personal intentions.

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References:
[1] https://www.morningstar.com.au/personal-finance/why-54-trillion-wealth-transfer-is-generational-tragedy
[2] Ibid.
[3] https://www.afr.com/wealth/personal-finance/succession-warring-families-undermining-3-5-trillion-of-inheritances-20230526-p5dbjo
[4] https://www.uniting.org/content/dam/uniting/documents/families-report/uniting-families-report-2024.pdf
[5] https://www.afr.com/wealth/personal-finance/how-blood-trusts-can-keep-step-kids-out-of-your-inheritance-20240206-p5f2q8
[6] https://www.afr.com/wealth/personal-finance/big-increase-in-inheritance-feuds-among-blended-families-20191212-p53jbs
[7] https://ballantynelaw.com/insights/contested-wills-statistics/
[8] https://www.afr.com/wealth/personal-finance/the-reason-so-many-adult-children-are-challenging-wills-20250122-p5l6i2
[9] https://coredatainsights.com/client-insights/not-tomorrows-problem-generation-life/
[10] https://generationlife-endpoint.azureedge.net/live/attachments/cl7qyf0ki0dld0pnpib4q0can-generation-life-estate-planning-guide-july-2022.pdf
[11] Ibid.
[12] Ibid.

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Investment Bonds can offer financial advisers a versatile, tax-efficient investment structure capable of complementing or substituting traditional vehicles such as superannuation and trusts

Introduction

Beyond Super: Why investment bonds are shaping the next era of wealth planning

For more than three decades, Australia’s superannuation system has been in near-constant motion. What began in 1992 with the introduction of the Superannuation Guarantee has since been reshaped by a rolling series of reforms, each altering the rules that govern how Australians save for retirement. From Simplified Super in 2007 to the Transfer Balance Cap in 2017, the pattern has been one of regular intervention.

The major superannuation tax policy changes recently announced by Treasurer, Jim Chalmers is only the latest example. While the measure appears to only target a narrow group upon application, it has reignited wider debate about the stability of Australia’s retirement-savings system and the need for broader, more flexible wealth strategies.

As a result, financial advisers are exploring tax smart strategies as tax and regulatory reforms may increasingly constrain wealth structures. With clients seeking alternative solutions for wealth accumulation and intergenerational transfers, investment bonds continue to gain strong momentum as one of the most flexible and tax-effective options.

Investment bonds present a compelling, tax-effective alternate or complement to superannuation and other investment vehicles. Governed by both Life Insurance and tax legislation, investment bonds combine highly tax-effective investment solutions with strategic flexibility, estate planning advantages, and diversity in investment choice.

Core uses of investment bonds:

• Investing tax-effectively: All earnings are taxed at a maximum rate of 30%. The effective long-term tax rate can be significantly lower depending on the investment options you choose.
• Providing estate and succession planning flexibility and certainty: Transfer wealth to future generations tax-free and with certainty and peace of mind.
• Looking for an alternative to superannuation: There are no limits on how much and when you can contribute to an investment bond. Funds can be accessed at any time, you don’t have to wait until preservation age.
• Managing income levels in private trusts: Earnings generated by an investment bond are retained within the investment bond and need not be declared and distributed.
• Creating an income stream: You can create a regular income stream and there are no restrictions on when you can start the income stream – particularly useful if you are intending to retire early and access to superannuation is not available.
• Qualify for or improve social security benefits: To help manage or improve Government benefit entitlements in particular circumstances.

Legislative & structural overview

Investment bonds: defined

An investment bond is a tax-paid investment vehicle sometimes referred to as an insurance bond providing flexibility, control and access at any time. Investment bonds are offered by a life company structure, meaning they are subject to the Life Insurance Act and relevant tax provisions under the Income Tax Assessment Acts.

Investment earnings are taxed at a maximum rate of 30% within the investment bond. The actual effective tax rate may be lower as a result of the effective tax management practices implemented by the product issuers. No tax is paid by the investor on the investment earnings while they remain invested. Investors also have the flexibility to alter their investment options at any time usually without any switching fees or personal tax implications.

Investment bonds can provide access to a range of investment options to accommodate individual preferences and risk tolerances. Income and growth generated by an investment bond is usually not distributed to investors and held within the investment bond. This can help with managing personal tax assessable income levels and personal tax liability.

It’s for these reasons that investment bonds can offer a powerful, long-term tax-effective way to accumulate wealth for investors.

Consistent legislative stability

Investment bonds have enjoyed stability in their tax legislative framework having largely remained
unchanged since the tax rate was aligned to the company tax rate of 30% in 2001. This contrasts with superannuation, which has had over 30 major changes to its legislation and related government policies since the introduction of compulsory superannuation in 1992.

Superannuation remains a highly tax-effective way for most Australians to save for retirement, offering concessional tax treatment of contributions and favourable tax rates on earnings. But today, in light of potential superannuation reforms such as Division 296, Australians are reminded that complexities and constant changes often bring uncertainty – and that trusted advisers are essential in navigating both.

As legislation shows little signs of stabilising, it’s more important than ever to diversify financial and wealth accumulation strategies. Investment bonds, for example, offer tax advantages, flexibility, and estate and succession planning benefits, along with the track record of legislative certainty, making them a compelling option for those who may be impacted by the possible changing legislative landscape, both now and in the future.

Tax can be one of the biggest costs associated with any investment

Australian investment managers generally report on investment portfolios with a headline (pre-tax return) which does not necessarily reflect consumable returns in the hands of investors.

Investment returns and investment costs are two key factors that investors tend to focus on. But another critical factor is often overlooked – the impact of tax.

Tax is often the biggest cost for investors, and investors can feel very limited by the strategies available to reduce that cost. However, the impact of tax isn’t tomorrow’s problem.

How tax can erode returns:

An investor on the top marginal tax rate can lose up to 47% of portfolio returns to tax and Medicare.

As a guide, an investor who earns a pre-tax return of 5.0%p.a. on a managed Australian share fund may have their after-tax return whittled down to 3.1%p.a., even after allowing for dividend imputation credits.

In effect, 1.9% of the original before-tax 5% return – almost 40% – is lost to tax ^[1]

The compounding effect of this can be significant over time. Not being aware of the effects of tax can have a significant impact on your clients’ after-tax investment returns.

A tax aware approach to investing connects the dots and can reduce the impact of tax by pro-actively managing to reduce tax using a range of implementation strategies.

The reward for investors can be higher after-tax returns without taking on additional investment risk. As less tax means more to invest, the tax savings may compound over time, helping investors reach their financial goals sooner.

Investment bonds can provide a tax-effective solution to grow wealth, with tax on earnings capped at a maximum of 30%. Effectively, they can deliver improved after-tax returns with no additional investment risk.

Latest innovations in investment bonds

Investment bonds continue to deliver a tax-effective solution for building wealth through a range of investment options tailored to suit the investor’s objectives. But the opportunities go much further. Today’s investment bonds are using exciting new strategies to reduce the effective long term tax rate for many growth-oriented investments. In such a case, investors can enjoy the best of the five benefits below:

• A diverse portfolio spread across a variety of asset classes
• Enhanced after tax returns, deepening the benefits of compounding
• The ability to invest to achieve a variety of personal goals
• Access to their funds when needed.

Key tax benefits of investment bonds

1. Maximum tax rate of 30%

Unlike most direct investments — where assessable earnings for personal investors are taxed at their marginal tax rate plus Medicare levy — assessable earnings within an Investment Bond are taxed internally at a maximum of 30%. For clients in the 39% or 47% tax brackets, this represents an immediate tax arbitrage.

2. Effective tax rate reduction – tax optimised investment options

Through active tax optimisation of Investment Bonds, the effective long-term tax rate within some Bonds can be between 10% and 15% p.a. depending on the investment option(s) selected by the investor.

3. A tool against “bracket creep”

Earnings are taxed within the Investment Bond and held as otherwise distributable income that can accumulate.

Investment bonds can help shield clients from being pushed into higher brackets, by not distributing assessable income year-on-year. For clients worried about rising personal tax rates, this can help manage and improve after-tax outcomes.

4. After-tax investment outcomes and compounding returns

The returns from and performance of Investment Bonds are provided on an after-tax basis, unlike many other investments – such as managed funds, shares and term deposits – where the returns are often quoted before tax and are then taxable at your client’s marginal tax rate plus Medicare levy each year.

Over the long-term, the compounding benefit of a lower effective tax rate on earnings generated and retained within an investment bond can be significant when compared to direct investment options where the impact of the tax is generally incurred at a personal level annually, with less remaining to re-invest.

Analysis by one investment bond provider shows that an individual on a 47% marginal tax rate (includes Medicare Levy) can grow an Australian share portfolio by an extra 56% over a 20-year period when the long term average tax rate of investment returns can be lowered to 10%.

5. The 10-year advantage

If the investment bond is held for at least 10 years, withdrawals — including all earnings — are free from any additional personal taxes.

• The 10-year period starts from the investment’s commencement date
• Additional contributions of up to 125% of the previous year’s contributions can be made annually without resetting the 10-year period (the “125% rule”)
• Withdrawals before 10 years may result in an assessment of earnings, but these attract a 30% tax offset, to reduce any top-up tax liability.

6. Flexibility to switch at any time with no personal capital gains tax

Investment Bonds offer flexibility to switch between investment options at any time. Switching within an Investment Bond also does not trigger a personal CGT event. This is because the transactions occur within the investment bond’s tax structure, where the life company accounts for any realised capital gains.

7. Death benefits paid tax-free

Upon the death of the life insured (which is normally the owner, but can be another person), proceeds from the investment bond are paid tax-free to nominated beneficiaries — regardless of their dependancy status. This contrasts with superannuation, where non-dependants can face a death benefits tax of up to 17% (including Medicare levy) on the taxable component.

Additional benefits of investment bonds

• Simple tax reporting – There is no need to provide a tax file number, and no annual tax reporting is required while the investment is held. Furthermore, there is no tax reporting on a withdrawal provided you do not make the withdrawal within the first 10 years.
• Access to the investment at any time – unlike superannuation, an investment bond offers investors complete access at any time – you don’t have to meet any age or retirement requirements to access the investment.
• Protection from creditors – Similar to superannuation, if an investment bond is appropriately structured and owned by an individual and they or their spouse (including de facto spouse) are nominated as a life insured, the investment can be protected from creditors in the event of bankruptcy. This protection applies to the investment bond itself and can apply to proceeds from the investment bond received on or after the date of bankruptcy.
• Peace of mind for funeral expenses – A simple and tax-effective investment designed to help pay for future funeral costs, so to ease the financial burden on loved ones during their time of grief. Funeral bonds are also exempt from asset and income test (up to $15,750 as at 1 July 2025), which can help improve social security benefits.

Diversified strategies across multiple structures

The financial landscape is marked by constant change and growing uncertainty. Long-standing structures such as superannuation, family trusts, and other investment vehicles are increasingly subject to government review and reform.

Now more than ever, diversified strategies across multiple financial structures are critical. This approach not only helps mitigate the risks posed by potential legislative changes, but also provides much-needed flexibility, resilience, and control. As part of a broader diversified strategy, investment bonds are emerging as a powerful, tax-effective vehicle—particularly relevant in today’s financial landscape.

Managing distributable income in trusts

A private, discretionary or family trust can decide to reduce its distributable income if invested in an investment bond. Unlike other investments such as shares, managed funds and term deposits, an investment bond does not distribute taxable income to investors unless a withdrawal is made before meeting the 10-year rule requirement.

There are also no trust or personal capital gains tax consequences when modifying the trust’s investment strategy via an investment bond. While the trust remains invested in an investment bond, there is no annual taxable income in the hands of the trust that it must distribute.

The ‘125% opportunity’

Unlike superannuation where personal contribution amounts are capped and subject to penalty tax rates if exceeded, investment bonds provide much greater flexibility on how much can be contributed to the investment. There are no restrictions with an investment bond on the maximum amount that can be invested, unlike superannuation where the non-concessional contributions cap and the  total balance cap limit investors’ abilities to make additional non-concessional contributions.

With an investment bond, there are no limits on the maximum amount that can be invested in the first investment year, which starts on the day the investment bond is set up. Each subsequent investment year starts on the anniversary date of the investment bond’s initial start date.

Each investment year, additional contributions of up to 125% of the previous year’s contributions can be made without re-setting the 10-year advantage period. This means that these additional contributions benefit from being treated (for tax purposes) as if they were invested at the same time as the initial contribution. They do not have to be invested for the full 10 years to be included as part of the 10-year advantage.

It is important to know that the 10-year advantage will restart if:

• no additional contribution is made in a particular investment year, and an additional contribution is made in any subsequent investment year.

Furthermore, if contributions in an investment year exceed 125% of the previous investment year’s contributions, then that is also possible, however, the 10-year advantage period will restart.

If a client wanted to make additional contributions but did not want to reset the 10-year advantage period on their investment, they could instead start a new investment bond. Alternatively, setting up an investment bond with a Regular Savings Plan and automatically increasing the regular savings amounts each year would provide a simple and effective way to automatically take advantage of the 125% opportunity.

Case Study: Comparing alternative tax structures^[2]

John, 50, is a medical specialist, who given his profession, is subject to malpractice risk. He has surplus income of $50,000 per year after PAYG tax and his earnings put him on the highest marginal tax rate of 47% (including Medicare levy). He also has a super balance of over $3million and, if Div 296 is reintroduced and brought in, some super earnings would be subject to the additional 15% tax.

John recently received a $500,000 death benefit payment from his late mother’s super (after paying his share of death benefit tax). Due to John’s total super balance, he can no longer make non-concessional contributions into his super. He intends to continue working but would like the flexibility to access his funds before fully retiring. He also wants to reduce his working hours from after age 60.

John’s financial adviser puts forward three options for John to invest his death benefit payment proceeds and surplus income in alternative structures. His adviser presents the options along with anticipated after tax proceeds after remaining invested for 15 years, about:

1. Investment company = $3.02million
2. Discretionary trust with a corporate beneficiary = $3.87 million
3. Investment bond = $4.39 million

The numbers are compelling – the investment bond offers an increased return of $1.29 million when compared to the Investment Company and $490,000 more than investing through a private trust with a corporate beneficiary.

By investing in an investment bond, John has:

• The ability to access funds at any time for when he decides to reduce his work hours.
• A tax effective investment structure.
• Simple ongoing administration and monitoring with no set up costs.
• No potential Division 7A issues and requirements to manage that may otherwise arise when utilising corporate structures such as “bucket” companies.
• No deferred tax impact, often the case where corporate entities are used to hold investments.
• The benefit of the investment being protected from creditors in event of bankruptcy.
• The ability to set up the investment a non-estate asset, giving him flexibility in how and when to pass his wealth on.

The opportunity for John’s adviser is clear. Investment bonds provide a strategic and tax-effective solution that preserves flexibility and ensures access to funds at any time. While this case highlights the benefits of tax-effective investing, investment bonds can also deliver strong outcomes in other scenarios — such as intergenerational wealth transfers and estate planning.

Case study assumptions

Assumptions: $500,000 initial investment, $50,000 p.a. contribution, from year 1 to year 15 at John’s 47% MTR including Medicare levy). The graph above compares investment strategies held through a Generation Life Investment Bond, a family trust with a corporate beneficiary and John as the other trust beneficiary, an investment company invested an Australian and international share portfolio over a 15-year period. The returns assume a 12.1% p.a. total return  on the portfolio( before tax) with a franking level of 89.4%, an income return of 3.4% p.a. and growth return of 8.8% p.a. Both the corporate beneficiary and investment company are taxed at a rate of 30.0% as a non-base rate entity for tax purposes. Progressive marginal tax rates for John are used (including 2% Medicare Levy) as at 2024/2025 rates and with other PAYG earnings indexed at 3% p.a. Underlying investment income is assumed to be reinvested and a full withdrawal made at the end of the 15-year period and paid to the investor. Returns are based on historical investment returns and expected tax components. Generation Life does not make any guarantee or representation as to any particular level of investment returns. Past performance is not an indication of future performance.

Conclusion

Investment Bonds can offer financial advisers a versatile, tax-efficient investment structure capable of complementing or substituting traditional vehicles such as superannuation and trusts. With capped tax rates, strategic withdrawal rules, and estate planning flexibility, they can provide prime and tangible after-tax benefits, particularly for high-income earners, retirees with large super balances, and families seeking certainty in wealth transfer.

As the debate about the stability of Australia’s retirement-savings system and the need for broader, more flexible wealth strategies continues, the role of investment bonds as an alternative is poised to expand — making it critical for financial advisers to master the technical details and strategic uses of these products.

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Notes:
[1] Case study source: Generation Life
[2] Stop your investment returns being consumed by tax, Generation Life 2020,

Disclaimer: Generation Life Limited (Generation Life) AFSL 225408 is the product issuer and provides general financial product advice and other services related to investment life insurance products and life risk insurance products. Any superannuation general financial product advice provided is by Generation Development Services Pty Limited ABN 14 093 660 523 (GDS) as Corporate Authorised Representative, No. 001317211 of Evidentia Financial Services Pty Ltd AFSL 546217 ABN 97 664 546 525 (Evidentia). The information provided is general in nature and does not consider the investment objectives, financial situation or needs of any person and is not intended to constitute personal financial advice. The product’s Product Disclosure Statement (PDS) and Target Market Determination (TMD) are available at www.genlife.com.au and should be considered in deciding whether to acquire, hold or dispose of the product. Superannuation products’ PDSs, offer documents and TMDs are available from the websites of their product issuers. Professional financial advice is recommended. Past performance is not a reliable indicator of future performance.  Generation Life, GDS and Evidentia do not make any guarantee or representation as to any particular level of investment returns. Generation Life does not accept any responsibility or liability for superannuation general financial product advice provided by GDS. Generation Life’s investment bonds can provide certainty as they are governed by legislation that has changed infrequently and can be appropriately structured to bypass an estate and be protected in case of bankruptcy of the life insured. Investments carry risks.

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An improved understanding of the balance between legacy and liability, and the important tax consequences that emanate from estate planning.

More than a legal formality or a financial checklist, or deciding who inherits what assets, estate planning exists to protect a lifetime of achievements and ensure each client’s legacy is passed on according to their wishes. This article, proudly sponsored by Allianz Retire, explores the importance of tax considerations in estate planning.

Estate planning. It represents the culmination of a lifetime of work, the chance to protect assets and the opportunity to pass on wealth. At its core, estate planning is about leaving a legacy that reflects each client – who they are and what matters to them.

Yet even the most thoughtful estate plan can be undermined by tax implications if they are not carefully managed. From capital gains and inheritance considerations to the complexities of superannuation and trusts, tax plays a central role in how wealth is preserved and transferred.

Properly structured, an estate plan can help individuals and families navigate the complexities of wealth transfer, minimise tax payable by beneficiaries, consider any social security impact and create outcomes that reflect both their values and their intentions.

Estate planning is equally important for businesses as it is for individuals. Without structured tax planning, a considerable portion of an estate — whether personal or commercial — may be eroded by taxation, leaving beneficiaries with less than the client intended.

When guiding clients through estate planning, advisers should keep several important factors in mind:

• Jurisdictional differences – estate planning legislation varies by state, making it essential to understand and apply the rules specific to each client’s circumstances.
• Specialist input – encourage your clients to engage professionals early as collaboration between financial advisers, accountants and estate lawyers will ensure all aspects of estate planning are addressed.
• Philanthropy – directing part of an estate to charities can provide tax relief while also reflecting your client’s personal values.
• Ongoing review – estate plans are not set and forget. Life events such as marriage, divorce, the acquisition or sale of a business, or changes in family structure (births and deaths) can significantly alter the client’s intentions and tax position. Regular reviews are necessary to maintain alignment with current circumstances.

Ultimately, a well-constructed estate plan can secure the orderly transfer of assets, minimise tax liabilities and strengthen the client’s position should legal challenges arise. For advisers, ensuring clients adopt a proactive and regularly updated approach is fundamental to preserving wealth and intent across generations.

Tax matters and estate planning

The aim of estate planning is simple: to ensure that assets are distributed according to an individual’s wishes in the most efficient and equitable way. However, tax can significantly affect this outcome. Every dollar lost to unnecessary tax is a dollar less available to beneficiaries.

For example, a property that has grown substantially in value may trigger a large capital gains tax bill when sold after death, reducing the inheritance for children. Similarly, superannuation benefits may be taxed differently depending on whether they are left to dependants or non-dependants. Without careful planning, families can face unexpected liabilities, disputes, and even the forced sale of assets. Tax should never be treated as an afterthought. It is central to the design of any effective estate plan.

Capital Gains Tax

Capital Gains Tax (CGT) is often the most significant tax issue in estate planning. Assets such as real estate, shares and investment portfolios may have appreciated substantially over time. While the transfer of assets to beneficiaries on death does not immediately trigger CGT, the eventual sale by the beneficiary does. The cost base of the asset is carried over, meaning that substantial gains prior to the inheritance of an asset can still lead to large tax liabilities in the future.

Certain exemptions exist, most notably for the family home. However, these rules are complex and vary depending on how long the property is held after death. Therefore, good record keeping is essential. For example:

• Knowing what assets were acquired pre-CGT and which may attract capital gains tax.
• Is the family home a pre- or post-CGT asset and would it be wholly or partly covered by the main residence CGT exemption?
• Most clients can reduce taxable capital gains by claiming expenses but require records to substantiate any such claims.
• Assets acquired pre-CGT (prior to 20 September 1985) may not be subject to capital gains, however your client needs records to prove the asset is a pre-CGT asset.
• Changes to holdings in shares and managed funds that might arise because of dividend reinvestment, merger and acquisition activity, bonus issues and so on. Again, knowing which pre- and post-CGT holdings is important.

Key components of an estate plan

A comprehensive estate plan encompasses several elements to ensure your client’s wishes are honoured and their assets effectively managed:

• The Will – the Will is the foundation of any estate plan and details how a client’s assets should be distributed after death. It also designates an executor responsible for administering the client’s estate according to their specified wishes.
• Super – clients should make binding death nominations for super. The allocation of super is managed by each fund’s trustees and can’t be distributed via a client’s will. Binding and non-binding super beneficiaries will receive any unspent super money from the trustee.
• Power of Attorney (POA) – this allows your client to appoint a trusted individual to manage their financial and legal affairs in the event they become unable to do so themselves. An Enduring Power of Attorney is a specific type of POA that remains in effect if the client becomes incapacitated or unable to make decisions.
• Enduring Guardianship – in some jurisdictions, a medical Power of Attorney is granted, in others, an Enduring Guardianship grants a designated person the authority to make decisions regarding your client’s health and lifestyle should they become unable to do so.
• Advanced Care Directive – sometimes referred to as a Living Will, this document enables your client to outline their preferences for medical treatment and end-of-life care in situations they are unable to communicate their wishes.
• Trusts – a legal arrangement in which a trustee manages assets on behalf of beneficiaries, with distribution/s occurring at a predetermined time. Trusts can offer tax advantages and protect assets; an example is the establishment of a trust for a child that becomes accessible at a specific milestone birthday or other point in time.

All legal documents are best created by an estate lawyer. There are also a range of legal implications to consider:

• All estate planning documents must meet the legal requirements for validity. This includes compliance with relevant legislation, which varies by state or territory.
• Understanding the tax consequences of asset transfers is essential; you need to consider capital gains tax, stamp duty and income tax, each of which can significantly impact the value of assets passed to beneficiaries.
• Legal capacity is important to avoid potential challenges to the Will in the future. Your clients need to create a Will at a time they have the legal capacity to do so. No-one expects to lose capacity, but steadily increasing dementia rates means that statistically, it’s likely it will affect some of your clients (note: it is estimated that more than 433,300 Australians are living with dementia in 2025, a figure estimated to rise over the coming years^[1].

The Will

The Will is the cornerstone of estate planning. It serves as the primary legal document that outlines how a client’s assets should be distributed upon death, or in some cases, permanent incapacitation. Importantly, a Will ensures that your client’s wishes are clearly stated and legally enforceable, helping to avoid potential disputes among beneficiaries.

The functions of a Will include:

• Simplified estate administration – a valid will streamlines the process of handling your client’s estate after death. This expediates the process and reduces complications for all involved
• Asset distribution – a Will specifies who receives the client’s property, money, and personal belongings after death, ensuring their assets go to their chosen beneficiaries.
• Guardianship for minors – clients can name a guardian to care for their dependent children and make important decisions about their education, health and wellbeing
• Appointment of an executor – a will appoints an executor (or representative) who is responsible for managing the client’s estate; this includes securing assets, paying debts and distributing property according to your client’s instructions
• Establishment of trusts – as discussed later in this article, the Will can create testamentary trusts, which allow you to control how and when beneficiaries receive their inheritance
• Prevent disputes – by specifying who receives what, a client’s Will can prevent arguments and confusion among family members regarding the division of their estate

A Will plays other important roles. It revokes or cancels earlier Wills, enables clients to appoint a guardian for minor children and make specific bequests to individuals or charities. By formalising these decisions in a Will, your client takes control of their legacy.

Clients may hold two types of assets: estate assets and non-estate assets. The former includes any asset the client owns in their own name. Non-estate assets include those owned as a joint tenant, in a trust or in superannuation. Life insurance is also generally disposed of according to specific rules and not distributed via the client’s Will.

Without a Will, a client’s estate may be distributed according to state intestacy laws. This may not align with your client’s preferences and there’s the very real risk that the undocumented intentions of your client in relation to their estate may not be acted on. Further, depending on the marginal tax rates of the beneficiaries, intestacy can lead to an imbalance in the distribution of an estate due to higher rates of tax payable by some beneficiaries.

Intestacy can also reduce the size of your client’s estate thanks to other charges; for example, the administration of an estate is more expensive when outside parties are involved and compensated for their services. The family can generally expect to pay the government more revenue, in the form of legal and other fees, capital gains tax and income tax.

Powers of Attorney

While a POA won’t impact the tax implications of estate planning, it’s good form for clients to nominate a power of attorney while they are preparing their Will. As with the Will, each state has its own legislation in respect to POAs.

A POA is a separate legal document that enables your client to appoint one or more people to manage their financial and legal decisions on their behalf while they are alive. A POA ceases upon death.

An Enduring Power of Attorney (EPA) can be used to make decisions for your client in the situation they are unable to do so, if for example, they lose capacity. An attorney is legally required to act in your client’s best interests; therefore, the appointment of a trusted person to as POA should ensure your client’s affairs are managed as they would like them to be in the event they become incapacitated before death.

An EPA is of particular importance to those clients within a self-managed super fund. Regulations require all members of an SMSF to be trustees, but a person without capacity is prohibited from being a trustee. In the situation where a trustee of an SMSF loses capacity – whether your client or a non-client member of a client’s SMSF – decisions about the SMSF would have to be made by a tribunal if there is no EPA in place for that member. It’s good form to ensure that all SMSF clients have EPAs in place – and that all members of their SMSFs do too.

Superannuation

According to recent headlines, at least 6.5 million Australians will not have a say in who inherits their superannuation, according to research from Super Consumers Australia^[2]. The research found that just one quarter of those surveyed were sure they had made a legally binding nomination for who they want to receive their super after they die, while 36 percent had made no nomination at all.

Binding death nominations are important because as a non-estate asset, superannuation is treated differently to other investments. Because it’s managed by the trustee of your client’s fund, it can’t be incorporated into or distributed by their will.

There are four important considerations when estate planning for client’s superannuation^[3].

1. When a super fund’s member dies, the money is paid out of the fund
2. Only certain people (i.e. nominated beneficiaries) are eligible to directly receive a superannuation death benefit
3. Insurance proceeds inside a super fund may be heavily taxed on the member’s death
4. In some circumstances, there can be a death tax on super; there are strategies to minimise this or for beneficiaries to avoid becoming eligible to pay it.

Each client needs to nominate superannuation beneficiaries who will receive any remaining super once they pass away. There are two types of beneficiaries: binding and non-binding beneficiaries.

A binding death benefit nomination is a written declaration your client provides to their fund. This provides a legal obligation for the trustee to distribute your super to those people nominated by the client. Binding nominations are generally required to be validated every three years.

A non-binding nomination is the preferred choice of beneficiary that your client selects, the difference being that the super trustee is not obligated to follow this nomination. When distributing your remaining super, the trustee will take your non-binding nomination into account, along with the claims of other dependants.

In both cases, trustees must follow the relevant super laws. Beneficiary nominations are made available so clients can legally ensure their chosen beneficiaries receive payment, even where there may be claims over your client’s estate after their death.

Superannuation is also an area where tax plays a major role. Whether superannuation balances are distributed through the estate or directly to beneficiaries via a binding death benefit nomination, the tax treatment depends on the relationship between the deceased and the beneficiary.

It is important to know which beneficiaries are SIS-dependent beneficiaries and which are tax-dependent beneficiaries. In super law, this defines who can receive death benefits; in tax law, it defines if and how a recipient will be taxed.

Dependants for tax purposes, such as a spouse or minor children, generally receive superannuation benefits tax-free. However, adult children who are not financially dependent may face significant tax on lump-sum payments. This can create tension where parents wish to treat children equally, but the tax outcomes are not the same. Proactive strategies, such as using recontribution strategies, can help reduce tax burdens on beneficiaries.

A client can nominate an eligible dependant, such as their spouse, to continue receiving an income stream rather than a lump sum payment. This is called a reversionary pension and only applies to super savings already in pension mode.

From a tax perspective, there are several benefits to a reversionary pension:

• A super pension is generally tax free or in some cases, concessionally taxed, depending on your client’s age and the age of their beneficiary. Consequently, there may be tax benefits for the reversionary beneficiary.
• Because the assets supporting the pension payments remain within the super system, they continue to benefit from super’s lower tax environment.
• When the reversionary pension reverts to the beneficiary, the taxable and tax-free components that were calculated when the pension first started are preserved.

Where life insurance is held within super, any proceeds are paid as part of the superannuation death benefit to beneficiaries. As such, tax will be payable by those beneficiaries who are not tax-dependents.

Trusts

Using a trust in estate planning can provide tax efficiency (particularly for minors), asset protection (against divorce, creditors and disputes), and control (over how wealth is distributed across generations). A trust can help to preserve wealth and ensure it is both used tax-effectively and transferred in line with family intentions, rather than being exposed to erosion through tax, disputes or poor financial decisions.

Discretionary Trusts

Discretionary trusts – which includes family trusts – can be a powerful tool for estate planning. One of the key benefits is that trust assets fall outside the deceased estate and therefore bypass the probate process. This means distributions to beneficiaries can occur without the delays, costs or potential challenges associated with probate. Trust structures also provide stronger protection against family disputes and claims from creditors.

Another advantage is the control and flexibility a trust provides in managing intergenerational wealth. Trustees can adapt distributions to suit beneficiaries’ circumstances, and new family members can be added as beneficiaries without having to amend the trust deed.

Finally, because control of the trust can be transferred to a new appointor or to directors of a corporate trustee, a discretionary trust has the capacity to preserve and grow family wealth across multiple generations.

Testamentary Trusts

A testamentary trust can play a major role in the estate planning process and is usually written into the client’s Will and is dormant until the client’s death.

Administered by a trustee, a testamentary trust enables your client to leave money to beneficiaries who have use of that money – often subject to certain conditions – but it’s not their own property. This is a strategy commonly used to provide protection against relationship breakdowns, creditors, poor decision making and potential legal issues.

Clients may consider a testamentary trust in circumstances such as:

• They wish to protect their assets for future generations. For example, your client’s beneficiaries can benefit from assets such as an investment portfolio or family business, while the trustee controls how they’re managed. In this scenario, the assets are protected from potential legal action or actions of individual beneficiaries that could otherwise impact them.
• A client has a blended or complex family structure. Numerous scenarios can be modelled by the trustee to preserve assets or to ensure the relevant beneficiaries can access assets in the trust if others pass away.
• Your client needs to protect vulnerable beneficiaries, such as a disabled child. A trust can ensure they don’t lose this inheritance to creditors or that funds are used in their best interests. For those with young children, a trust can hold assets and/or manage assets until the children are old enough to do so themselves.
• Depending on assets held, a testamentary trust can provide tax benefits for your beneficiaries.

From a tax perspective, income generated by a testamentary trust is taxed at the marginal tax rate of the beneficiary of that trust. A testamentary trust also facilitates income splitting, where a beneficiary can allocate trust income to other beneficiaries. This strategy enables beneficiaries with lower marginal tax rates to receive income and pay tax at their lower rate.

Further, minors who receive ‘unearned income’ are generally taxed at the highest marginal tax rate (although the first $416 is tax free). This is not the case with income received from a testamentary trust. Tax law provides that income and capital gains derived by children under age 18 from assets received from a testamentary trust are ‘excepted trust income’ and taxed at normal adult marginal rates.

This means a minor receiving income from a testamentary trust has a tax-free threshold of $18,200 before being taxed at the usual adult marginal rate, depending on the level of income. Imputation credits relating to franked dividends received can be used by the minor.

One of the main advantages of using a testamentary trust for bequeathed assets is that income, capital gains and franked dividends can be distributed among your client’s family beneficiaries each year in the most tax-efficient way.

One of the most delicate aspects of estate planning is balancing fairness with tax efficiency. A client may wish to divide their estate equally among children, but tax treatment can make this challenging. For instance, leaving an investment property to one child and cash to another may seem equal in value, but the property may carry future CGT liabilities that the cash inheritance does not.

Estate planning is a vital process that goes beyond simply dictating the distribution of assets after death; it plays a critical role in tax management, asset protection and ensures that your clients’ wishes are fully honoured. By carefully considering the various components of an estate plan, your clients can ensure that their financial legacy is preserved, tax liabilities are minimised and their loved ones provided for according to their intentions.

The ethical and emotional dimensions of fairness often intersect with the financial realities of tax. Advisers play a key role in helping clients understand the implications of their decisions, the importance of clear documentation, and where appropriate, communicating intentions to beneficiaries to prevent misunderstandings.

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Notes:
[1] https://www.dementia.org.au/about-dementia/dementia-facts-and-figures
[2] https://www.abc.net.au/news/2025-08-26/who-gets-your-superannuation-when-you-die-binding-death-benefits/105678326
[3] Wills, death and taxes made simple, Noel Whittaker, 2024

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What is the role of investment bonds and their role in the investment landscape?

Introduction

Tax-smart investing is one of the central pillars of quality, effective, financial advice. The capacity for tax to drag on investment returns, stifle compounding, and eat away at gains is substantial – especially in a highly taxed country like Australia – and applying the right strategies and structures can significantly amplify the growth of an individual’s wealth.

In Australia, superannuation has long been regarded as the pre-eminent tax-effective investment structure, allowing tax deductible contributions and concessional rates on earnings and withdrawals in retirement. But, as a vehicle for retirement savings, access restrictions mean advisers must also have other tax-smart strategies in their toolkit, for non-retirement wealth goals – such as education savings, or intergenerational wealth transfers. Additionally, the re-election of a Federal Labor government has ensured the introduction of Div 296 superannuation tax changes, which effectively double the tax paid on investment earnings for super balances over $ 3 million.

This growing need for tax-effective investment strategies outside of superannuation has seen advisers increasingly turn to investment bonds, spurring significant growth in the sector. But tax-smart investing isn’t just about lowering tax on earnings, it’s about considering the tax impact more broadly, in areas such as switches and transfers, estate planning and death benefits, policy risk, timing, and reporting and administration. In these areas too, advisers are finding reasons to embrace investment bonds as a powerful tax-smart structure.

In this article, we will take an under-the-hood look at investment bonds, and their role in the investment landscape – through a lens of tax-effectiveness. We will examine their features, use cases, and the ways they can meet a broad range of tax challenges faced by investors in Australia today.

Tax-smart investing as a core advice value-add

To the extent that tax can have a much greater impact on wealth outcomes than either management expenses or investment performance, it should be unsurprising that the selection of tax-effective strategies and structures is central to the financial advice value proposition.

Indeed, studies by both Russell^[1] and Vanguard^[2] concluded that tax-smart investing and planning was one of the most valuable benefits advisers delivered to their clients. Indeed, in quantifying the annual ‘alpha’ tax-smart advice at 1.3%, Russell’s 2024 ‘Value of an Adviser’ research concluded that optimising the tax treatment of investments added more value each year than asset allocation (1.1% p.a.).

In Australia, the tax-smart element of advice takes on extra importance due to the complexities of our tax system, and our relatively high personal tax rates, which sees personal tax account for a much bigger proportion of total taxation receipts than many other countries. In 2022 for example, personal tax revenue accounted for 40% of all tax revenue collected in Australia^[3] – well above the OECD average of 24%. Furthermore, the spectre of bracket creep looms large, with some estimates suggesting one million Australians could face the top marginal tax rate by 2030^[4] (triple the number of 10 years ago).

Defining tax-smart investing and core strategies

Tax-smart investing refers to selecting and structuring investments to minimise or defer tax liabilities while aligning with the client’s objectives, time horizon, and risk profile.

The core levers advisers can use within tax-smart strategies include:

• Minimising tax on investment earnings
  • Selecting vehicles with capped or concessional tax rates.
• Minimising tax on withdrawals
  • Using structures with tax-free redemption conditions (e.g., 10-year rule in investment bonds, retirement phase in super).
• Minimising tax on switches and transfers
  • Avoiding CGT on internal rebalancing or ownership transfers.
• Minimising tax on death
  • Using vehicles that pay tax-free death benefits to non-dependents.
• Reducing reporting/admin burden
  • Selecting structures that remove annual personal reporting requirements.
• Optimise timing of taxable events
  • Deferring of tax burdens until lower tax rates apply
• Minimising ‘policy risk’
  • Diversifying the strategies used, to mitigate the impact of any government policy or legislative changes, as is seen frequently with superannuation.

While both super and investment bonds can be suitable to meet many of these challenges, the last challenge listed – to minimise exposure to legislative changes – has taken on increased importance recently with the proposed Division 296 changes to superannuation tax. It is within this context that adviser interest in – and usage of – investment bonds is experiencing rapid growth^[5].

Investment bonds – tax benefits at a glance

The underlying legal structure of an investment bond is a life insurance policy with an investment component, issued by a life company or friendly society, and for this reason investment bonds are sometimes referred to as insurance bonds. But today’s offerings are certainly ‘not your father’s insurance bond’!

The key tax-smart features of an investment bond include:

• Earnings within the investment bond are taxed at a maximum rate of 30% (the company tax rate), but the effective tax rate can be lower through the use of franking credits and other strategies used by the issuer.
• They are tax paid investments, with no personal tax assessable income while the client remains wholly invested, and no annual tax reporting burden for individuals.
• No personal income tax is payable on withdrawals made after 10 years if the 125% rule is adhered to (see below for more details).
• Withdrawals can also be made within 10 years, on a tax-free basis for certain defined events (such as the death of the nominated life insured), or on a reduced tax basis between years 8 and 10.
• No personal capital gains tax when switching between investment options or making a withdrawal.
• They can be used to invest for the benefit of a child without minor tax rates applying.
• No tax on death benefits, even when paid to non-dependents.
• Flexible succession and estate planning features to control the transfer of ownership or future benefit payments without creating a taxable event.

Investment bonds – a closer look at the tax treatment

Because of the way investment bonds are taxed internally, they are often described as combining features of both insurance policies and managed funds. Through a combination of legislated tax concessions, and savvy portfolio management by the investment bond issuer, tax drag can be minimised at many points, amplifying the power of investment bonds as a tax-smart wealth building vehicle.

Tax-capped earnings

A maximum internal tax rate of 30% provides obvious relief for clients on marginal rates of up to 47%. Effective tax rates can be significantly lower – as low as 10-15% due to portfolio-level tax strategies such as franking credits and the tax-aware acquisition and disposal of underlying assets.

Tax-free withdrawals after 10 years

If held for 10+ years and the 125% contribution rules observed, withdrawals are completely tax-free to the investor, with no CGT, and no assessable income.

Uncapped access to tax-advantaged investing

Unlike superannuation, there are no caps on the amount that can be initially invested into an insurance bond. Investing millions or even tens of millions is allowable under current legislation. For each year after inception, you can then add up to 125% of the amount added the year before, without resetting the 10-year period.

Tax reduced withdrawals between years 8 and 10

On withdrawals made between 8 and 9 years after the investment bond inception date, only two thirds of the investment growth need be included in the holder’s assessable income. Between years 9 and 10 that drops to one third.

Tax offset of 30% and low-income earners

Any growth component received from an investment bond that is included in a person’s assessable income receives a 30% tax offset, reflecting the tax paid by the investment bond issuer. This can be particularly valuable for low income clients, as any remaining tax offset after accounting for the investment bond earnings can be used to reduce tax payable on other income.

Tax-deferred compounding

Because earnings are retained pre-personal-tax, the compounding effect occurs on a larger base, enhancing long-term after-tax returns.

CGT-free switching and transfers

Internal switches between investment options incur no personal CGT. Ownership transfers (including to minors or testamentary trusts) where no consideration are also free of income tax and CGT implications for the parties involved, and do not reset the 10-year clock.

Wealth transfer and estate planning

Minimising the tax burden left to others in the event of wealth transfers, including in the event of death, is a critical part of financial planning. Investment bonds can help avoid creating unintentional tax events and therefore work to ensure as much wealth as possible is transferred to the intended beneficiary. Unlike super death benefits, which are taxable when paid to non-dependents, or the winding up of estates or distribution of discretionary trusts – where the tax status of beneficiaries comes into play – investment bonds allow tax-free death benefits to any nominated beneficiary, as well as the ability to facilitate tax-free transfers.

Tax paid investments: why the big deal?

The ‘tax paid natures’ of investment bonds offer several valuable benefits to investors, some obvious, and some not so. The table below provides a useful summary of the strengths and considerations applying of tax paid and non-tax paid structures.

Use cases and case studies for investment bonds

Use case 1 – avoiding the proposed Div 296 superannuation tax

Alex is a 64-year-old surgeon with $5m in her SMSF.

Under the proposed Div 296 changes, superannuation balances over $3m attract an additional tax on earnings of 15%, levied on the individual, and levied on capital gains even if they remain unrealised. Alex acts on the recommendation of her adviser to move $2 million into an investment bond.

Although the maximum tax payable on earnings within the investment bond is 30%, Alex chooses a provider and investment option with a historical rate closer to 10%, representing a significant saving on the 30% potentially payable under superannuation (15% + 15% Div 296 additional earnings tax).

An illustrative example of the outcomes can be seen in the table below:

Use case 2 – high-income earners reduce tax drag

A taxpayer on a marginal tax rate above 30% may achieve an overall higher investment value by using an investment bond and maintaining it for at least 10 years.

Max, a widower, is 81 years of age, a conservative investor and is ineligible to make non-concessional contributions to superannuation. He generates $140,000 investment income each year, including from a lifetime annuity which is indexed to inflation. The current level of income is above Max’s requirements. His financial adviser recommends investing a portion of his savings in an investment bond which will reduce his assessable income as investment bond earnings, while capped at 30%, can be closer to 10-15%, substantially lower than Max’s marginal tax rate (up to 39% including Medicare).

Use case 3 – low-income earners^[8]

An investment bond that is cashed in earlier than the 8th year has the full amount of the growth assessable with a 30% tax offset available.

If a person (for example, a non-working spouse) has a marginal tax rate below 30%, any remaining tax offset after accounting for the investment bond earnings can be used to reduce tax payable on other income.

Investors close to retirement can use investment bonds as a means of deferring assessable income to a time after retirement, when their marginal tax rate may reduce.

Conclusion

At a time when legislative shifts can quickly erode once-reliable tax advantages, investment bonds stand out as a flexible and resilient pillar within a diversified, tax-smart investment strategy. Their capped internal tax rate, potential for effective rates well below the maximum of 30%, and the ability to deliver tax-free withdrawals after 10 years provide tangible, long-term benefits for a wide range of client circumstances.

Unlike superannuation, investment bonds impose no contribution caps and allow unrestricted access to funds, making them adaptable to evolving needs and market conditions. Their estate planning advantages – including tax-free death benefits to non-dependants and the ability to bypass probate – add another dimension of strategic value, particularly for intergenerational wealth transfer.

For advisers, the growing popularity of investment bonds underscores the importance of looking beyond traditional structures to protect and grow client wealth in a tax-effective way. By integrating investment bonds alongside superannuation, trusts, and direct investments, advisers can create more robust, policy-resilient portfolios that deliver stronger after-tax outcomes, reduce legislative risk, and support a broader range of client goals.

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References:
[1] https://priority1.net.au/wp-content/uploads/2024/09/04fe234d-e856-4726-a8e4-8983bb8db6b6_AP0391_-_Value_of_an_Adviser_AUS_V1F_WEB_2408.pdf
[2] https://www.ch.vanguard/content/dam/intl/europe/documents/en/putting-a-value-on-your-value-quantifying-vanguard-adviser-alpha-eu-en-pro.pdf
[3] oecd.org/tax/revenue-statistics-australia.pdf
[4] https://www.afr.com/politics/one-million-australians-face-top-tax-rate-by-2030-20221005-p5bnao
[5] https://www.afr.com/wealth/superannuation/the-little-known-asset-class-set-to-soar-thanks-to-labor-s-super-tax-20250507-p5lx7b
[6] https://generationlife-endpoint.azureedge.net/live/attachments/cm3cwp71e1kw00qdx4orxgorz-generation-life-booklet-series-tax-aware-investing.pdf
[7] Ibid.
[8] https://www.mlc.com.au/content/dam/mlcsecure/adviser/technical/pdf/insurance-bonds-a-super-alternative.pdf

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Advisers need enhanced knowledge the tax regime and requirements that apply to clients using Self-Managed Super Funds.

Super assets reached $4.2 trillion at the end of 2024, with SMSF assets forming roughly one third of the superannuation savings pool and exhibiting a six percent year on year growth^[1]. This article, proudly sponsored by Allianz Retire+, explores the tax benefits of using SMSFs, the tax regime that applies and requirements particular to the sector.

The first self-managed superannuation fund (SMSF) was established in 1999. A quarter of a century later, SMSFs have amassed more than one trillion dollars in assets, held by some 638,411 SMSFs, representing 1,184,287 members^[2].

Figure one examines the number of SMSF establishments, windups and total numbers of both funds and members. The financial year ended 30 June 2024 continued the strong trend in the establishment of new SMSFs and saw the number of exits decline. The total number of both funds and members continued to increase.

Figure two illustrates the growth in SMSF assets, from both an average and median perspective. The averages are typically skewed by larger numbers, so the median assets per member and per SMSF are more typical for the majority of funds.

The latest ATO statistical report (December 2024) showed that SMSF members continue to be heavily invested in equities with listed shares comprising 27 percent of total SMSF assets (compared to 29 percent at December 2023). Real property, both non-residential and residential is the next largest asset class, at 16.5 percent, closely followed by cash and term deposits at 16 percent.

SMSF regulatory environment

All super fund trustees must meet the sole purpose test: to run their fund for the sole purpose of providing retirement benefits as outlined in the Superannuation Industry (Supervision) Act 1993 (SIS Act). SMSF trustees are no different. Despite the obligations SMSF trustees must meet, there are numerous reasons more than one trillion dollars is invested in these funds.

The most commonly cited reasons for managing retirement savings via an SMSF can be explained by one or more of the following:

• Direct ownership of assets rather than beneficial ownership through a superannuation fund
• Ability to own direct residential or commercial property
• Ability to borrow money via a closed trust to be used for investment purposes
• Ability to own a broader range of direct assets, including collectibles and works of art
• Capacity to manage tax more effectively.

While SMSFs undoubtedly have several advantages, whether or not a client can maximise the benefits of the SMSF structure will be dependent on the fund’s investment objective and those of its members. The reasons in favour of SMSFs outlined above are not relevant for all funds or all members and, in some cases, those benefits may be outweighed by the costs and time requirement associated with managing an SMSF.

Requirements for managing an SMSF include:

• Trustees need the skills and time to commit to managing an SMSF
• Trustees must operate the fund within the law that regulate SMSFs; failure to do so may lead to penalties for the trustee/s and tax consequences for the fund
• Trustees need to make investment decisions for the SMSF that are in the best interests of all members, while complying with the restrictions on investments applicable to SMSFs
• Trustees must comply with all ATO requirements for SMSFs as failure to conform can lead to a loss of tax concessions for the fund.

It can be expensive to establish and manage an SMSF and the fees paid to operate an SMSF may be more than would be paid to another type of super fund. One of those expenses is the annual audit. Each year, an SMSF must undergo an independent audit, undertaken by an independent approved SMSF auditor that is registered with ASIC. An approved auditor will:

• Examine the SMSF’s financial statements
• Assess the SMSF’s compliance with superannuation laws
• Provide trustees with a detailed report
• Report any contraventions of the SIS Act to the ATO.

Once the audit has been finalised, trustees need to complete and lodge a SMSF Annual Return (SAR) by its due date. The SAR is a comprehensive report that covers the SMSF’s investments, transactions and benefit payments. It also reports super regulatory information, member contributions and is used to pay the SMSF supervisory levy.

This levy is a fee charged by the ATO for its supervision and is added to the tax return for each SMSF. The levy has been $259 since the 2014-15 financial year and remains the same for the current financial year. Calculating the correct tax payable is up to the individual preparing the SAR.

If the SAR is lodged more than two weeks late, the SMSF won’t be able to receive contributions or rollovers until the SAR is lodged. Once an SAR is lodged, the trustee must pay any tax owing as well as an annual supervisory levy.

In cases where an SAR isn’t lodged for a longer time period, there are a range of penalties issued by the ATO. These range from financial penalties through to (in more extreme cases) the disqualification of the fund’s trustee/s.

Given the requirements of administering an SMSF, most fund trustees elect to pay for additional help. Services sought by SMSF trustees include:

• Preparation of the SAR
• Valuation of the SMSF’s assets at market value to accurately prepare the fund’s accounts, statements and SAR; some classes of assets must be valued and reported in a specific way detailed by the ATO and trustees must be able to provide evidence of the valuation
• Actuarial certificates for SMSFs paying income streams (pensions)
• Financial advice, including asset allocation and investment recommendations
• Tax advice
• Legal fees
• Assistance with fund administration
• Insurances for members.

It’s important that your clients understand that one of the benefits of SMSFs is not early access to their retirement savings. If money is withdrawn from an SMSF earlier than superannuation rules permit, penalties can apply and include:

• The amount withdrawn can be taxed at penalty rates
• The SMSF can potentially lose its tax concessions
• The trustees may be penalised for allowing fuds to be released early.

Tax and SMSFs

Each SMSF must register with the ATO for both an ABN and TFN. If this isn’t done, the fund will not be registered as an SMSF and therefore not entitled to tax concessions nor will employers be able to claim deductions for contributions they make to the fund.

The SMSF structure akin to a company in that SMSFs are deemed to have income (including contributions and investment earnings) and expenses for tax purposes. SMSF members are entitled to the same reduced tax rates that are available through public super funds; a basic tax rate of 15%, which can be further reduced by offsetting expenses and tax credits. Payments received after the age of 60 are tax free.

While these tax benefits are common to all super funds, SMSFs have more flexibility to implement tax strategies around capital gains, taxable income or franking credits to minimise the tax payable. To illustrate, a key advantage of using an SMSF is that trustees can control when assets are disposed of. This allows the trustee to manage capital gains in a more targeted way. For example, an SMSF acquires an asset today and it appreciates by 50% by the time the fund’s members retire. That asset can then be sold to provide income to the complying pension stream with no tax owing on the realised capital gain of the asset.

The flexibility of SMSFs enable trustees and their advisers to optimise tax efficiency for the fund’s members. By tailoring strategies to the individual circumstances of members, and leveraging options such as contributions, reserves and distributions, trustees can mitigate overall tax liabilities within the fund. In contrast, personal circumstances cannot be factored into pooled superannuation funds because members must be treated consistently.

The SMSFs structure also provides flexibility with respect to managing taxable liabilities. An SMSF requires only one tax return despite potentially having up to six members. If the fund includes retired members who are tax-exempt, while others remain subject to the 15% tax environment, strategic allocation of earnings from the tax paying members to the retired members can yield tax advantages.

Income tax

As long as an SMSF is a ‘complying fund’ – one that follows the laws and rules for SMSFs – income is taxed at the concessional rate of 15%. Non-complying funds have the highest marginal tax rate applied to income received by the fund. The most common types of assessable income for complying SMSFs are assessable contributions, net capital gains, interest payments, dividends and rent. The following commentary on tax refers to complying funds.

Contributions

Contributions received by an SMSF are included in its assessable income and are generally taxed as part of the SMSF’s income at 15%. Assessable contributions include:

• Employer contributions, including those made via salary sacrifice
• Personal contributions where the fund member has notified the trustee they intend to claim as a tax deduction

These contributions are taxed in the SMSF as income, but at the concessional rate of 15% up to the contributions cap. The cap is currently $30,000 per year and the non-concessional contribution cap is currently $120,000.

Non-concessional contributions made into an SMSF are not included in the fund’s assessable income. These may include:

• Personal contributions made by the member for which no income tax deduction is claimed
• Contributions made for a spouse
• Contributions made for a child under 18 years old.

In the case a member does not provide their TFN, the SMSF will have to pay additional tax on their mandated employer contributions and cannot accept other types of contributions. The additional tax rate is 34% for complying SMSFs and the maximum tax rate + 2% for non-complying SMSFs.

There is a significant difference in the treatment of contributions between super funds and SMSFs.  Because contributions to SMSFs are treated as income, tax is levied once the expenses of the SMSF have been deducted.

Earnings

An SMSF in the accumulation phase will have income earned from its investments taxed at 15%. Franked dividends paid by an Australian company may entitle the SMSF to a tax credit, which will reduce its overall income tax liability. As with income received from contributions, income derived from earnings will be taxed on an after expenses basis.

When an SMSF has members that have reached the pension stage, the investment income received by the fund can be tax-free. This is referred to as exempt current pension income, and it can be used to offset the tax liabilities of the SMSF where the fund has other members who have not yet retired. 

Non-arm’s length income

It is a regulatory requirement that an SMSF must always transact on an arm’s-length basis. The purchase and sale price of fund assets should always reflect the true market value of the asset and the income from assets held by an SMSF should always reflect the true market rate of return. The ATO will tax any non-arm’s length income at the highest marginal rate.

The ATO considers income to be non-arm’s length income for a complying SMSF if it is:

• Derived from a scheme in which the parties weren’t dealing with each other at arm’s length
• More than the SMSF might have been expected to derive if the parties had been dealing with each other at arm’s length.

For example, the ATO considers income derived by an SMSF as a beneficiary of a discretionary trust to be non-arm’s length income, as are dividends paid to the SMSF by a private company (unless that dividend is consistent with arm’s-length dealing).

Non-arm’s length income also includes income derived by an SMSF from a scheme where the parties weren’t dealing with each at arm’s length and where the fund incurred lower expenses in deriving that income than would be expected if the parties were dealing on an arm’s-length basis.

Deductions

Like a company, a complying SMSF can deduct losses or expenses from its assessable income, as long as those losses or costs that are incurred in producing or gaining assessable income or incurred in running a business for the purpose of producing that income. These losses and expenses reduce the amount of tax payable by the SMSF.

However, for those SMSFs wholly in pension phase generally cannot deduct losses and costs relating to income because they pay no tax. If a fund has both accumulation and pension members, the expenses generally need to be apportioned to determine the amount that the SMSF can deduct.

Expenses aren’t allowable deductions when they are incurred in gaining or producing exempt income, non-assessable income or expenses of a capital or private nature.

The ATO notes the following as specific deductions that can be claimed in full or in part:

• Managing the tax affairs of the SMSF or complying with an obligation imposed on the SMSF that relates to its tax affairs, for example, the SMSF Supervisory Levy
• Death, total and permanent disability, terminal illness and income protection premiums to the extent specified in the relevant law.

Operating expenses incurred by an SMSF that are generally deductible include:

• Management and administration fees
• Audit fees
• Australian Securities & Investments Commission (ASIC) annual fee.

When it comes to investment expenses, the exact nature of those expenses is critical when determining deductibility. Examples of deductible investment-related expenses include:

• Interest
• Ongoing management fees or retainers paid to investment advisers
• Costs of servicing and managing an investment portfolio, such as bank fees, rental property expenses, brokerage fees
• The cost of advice to change the mix of investments, whether by the original or a new investment adviser, provided any changes do not lead to the creation of a new financial plan.

If the investment-related advice covers other matters or relates in part to investments that do not produce assessable income, only a proportion of the fee is deductible.

GST

Most SMSFs don’t need to register for GST although those with an annual GST turnover of more than $75,000 must register for GST. Annual GST turnover doesn’t include contributions, interest and dividends or residential rent or income generated outside Australia. It does include gross income from the lease of equipment or commercial property.

Capital gains tax

In an SMSF, a capital gain is any profit made from selling an asset. It’s classed as income and taxed as such. Similarly, any loss made from selling an asset is deemed a capital loss. Both need to be included in an SMSF’s annual return to the ATO.

Because capital gains are treated as regular income and an SMSF’s income is taxed at the concessional rate of 15%, capital gains are also subject to a 15% tax.

If an asset has been held by a complying SMSF for more than 12 months before it is sold, any capital gain may be eligible for a tax discount of 33.33%. That means only two-thirds of the capital gain will be taxed – i.e. at the rate of 10%.

SMSFs pay tax on net capital gains, calculated as:

• The fund’s total capital gains for the year
• Less any capital losses for that year and any unapplied capital losses from earlier years
• Less the CGT discount of 33.33% and any other concessions (if eligible).

A capital loss is not an allowable deduction and can only be used to offset against capital gains. If capital losses are greater than capital gains in a financial year, they must be carried forward to be offset against future capital gains.

If the capital gain is used to fund an income stream (i.e. a member’s pension) then zero tax will be applied to the proportion of capital gain funding the pension.

SMSFs in pension phase

When income from a complying SMSF is used to provide a pension income stream, no tax is payable. Those SMSFs invested in Australian equities can claim franking credit refunds from the ATO for any excess credits.

Investment income received by an SMSF is tax exempt to the extent that those assets are supporting retirement phase income streams. This income, exempt current pension income, is claimed in the SAR once the SMSF commences payment of one or more retirement phase income streams. It is important to note that an SMSF is not automatically entitled to exempt current pension income – the trustee/s must take several steps to be able to claim it.

A note on SMSFs and property investments

One of the key benefits of an SMSF is the ability to directly own commercial or residential property. There are two primary advantages to holding property inside an SMSF.

1. A concessional tax on rental income. Rent received by an SMSF will be taxed at a maximum rate of 15%. Some expenses related to ownership of the property will generally be tax deductible to the fund, lowering the effective tax rate. These expenses include such as rates and property maintenance.
2. Secondly, superannuation tax rates also apply to a capital gain resulting from an increase in a property’s value. Consequently, depending on when the property is sold, any capital gains the SMSF makes on its sale could be tax-free.

For example, if a median-priced residential property of $667,000 is bought by a typical investor and sold a decade later for double the value, their capital gains tax can be $157,000. If it eventually doubles again in value, the tax bill climbs above $300,000. If that property is held in a SMSF member in retirement, the CGT is zero after age 60^[3].

Overall, self-managed super funds offer trustees flexibility to develop strategies that enhance tax efficiency for the fund’s members. This flexibility enables a customised approach that considers each member’s unique circumstances, using methods such as tailored contributions, strategic use of reserves and personalised distributions to reduce overall tax liabilities within the fund. Unlike pooled superannuation funds – where uniform rules apply to all members – SMSFs provide a personalised solution designed to meet specific member needs.

The simplified structure of SMSFs, which requires only a single tax return, streamlines tax administration. Trustees can use this structure to strategically allocate fund earnings, particularly benefiting retired members who may be eligible for tax exemptions. In this way, SMSFs combine control, customisation and tax efficiency, positioning them as a powerful vehicle for wealth creation and retirement planning.

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Notes:
[1] APRA Superannuation Statistics, December 2024
[2] ATO, Quarterly Statistical Report, December 2024
[3]  SMSF Association

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Testamentary trusts offer a powerful tool for estate planning, particularly for families looking to protect assets, provide for future generations and optimise tax outcomes.

Despite a perception that the use of trusts is the domain of the extremely wealthy, trusts can be used by a broad spectrum of clients to achieve a range of objectives, including effective tax management. This article, proudly sponsored by Allianz Retire+, examines trusts and tax.

A trust is a legal arrangement in which a person or entity (the trustee) holds and manages property or assets for the benefit of one or more beneficiaries. It is a versatile tool used to manage and protect assets and offers benefits in estate planning and tax optimisation.

While trusts are generally not considered legal entities, they are treated as taxpayer entities for tax administration purposes. Trusts are commonly used for investment, estate planning and business because they provide flexibility and control over how assets are managed and distributed.

Trusts – an overview

A trust is an obligation imposed on a person or other entity to hold property for the benefit of beneficiaries. It should have its own tax file number, which the trustee uses when it lodges income tax returns for the trust. A trust is also entitled to an Australian business number if the trust is carrying on an enterprise.

There are two main parties in a trust, the trustee/s and the beneficiaries. You may also see reference to the settlor, who is the person who creates the trust and transfers property or assets into it.

Key parties and obligations

Trustees can be an individual or a company – known as a corporate trustee – which are responsible for managing the trust’s assets. The trustee must act in accordance with the trust deed and relevant laws, including tax laws. Where the trust is established by a trust deed, the trustee must deal with trust property in line with the intentions of the settlor as detailed in the trust deed.

Under trust law, which is administered by states and territories, trustees are personally liable for the debts of the trusts they administer. They are generally entitled to be indemnified out of the trust property for liabilities incurred in the proper exercise of their powers, except in the situation where a breach of the trust has occurred.

Under tax law, the trustee is responsible for managing the trust’s tax affairs, including registering the trust in the tax system, lodging trust tax returns and paying some tax liabilities.

Beneficiaries are the people or entities entitled to receive the benefits of the trust, such as income or capital. Beneficiaries can be individuals, companies, or even other trusts. The trustee may also be a beneficiary but cannot be the sole beneficiary unless there are multiple trustees.

Tax treatment of trust earnings

For tax purposes, trusts are treated as distinct taxpayer entities. However, the way income is taxed depends on the beneficiaries’ entitlements to that income. Trusts generally distribute their earnings to beneficiaries, and the beneficiaries are taxed on their share of the trust’s net income, regardless of whether they have actually received the income.

The net income of a trust is its assessable income for the year, minus allowable deductions, and it is worked out on the assumption that the trustee is a resident, even if they are not. Because the income of a trust is determined in accordance with the trust deed and the net income is determined in accordance with tax law, the two amounts may differ.

The trustee is responsible for lodging the trust’s tax return and ensuring that the trust complies with tax laws. Special rules apply to certain types of income, such as capital gains and franked distributions.

The beneficiaries are taxed on their share of the trust’s net income. For example, if a beneficiary is entitled to 50 percent of the trust’s income, they will be taxed on 50 percent of the net income of the trust. Beneficiaries may also be entitled to receive franked distributions from the trust. If allowed by the trust deed, franked dividends can be streamed to particular beneficiaries for tax management purposes. For example, franked dividends may be allocated to those beneficiaries with the highest marginal tax rate.

The trustee pays tax on behalf of non-resident beneficiaries and minors. If there is no beneficiary entitled to the income, the trust is taxed at the highest marginal rate applicable to individuals.

Capital gains tax

Trusts also have specific rules related to capital gains tax (CGT). For example, if a trust disposes of an asset and generates a capital gain, that gain is included in the trust’s net income and distributed to the beneficiaries in proportion to their entitlements. In some cases, a trustee can choose to pay tax on a capital gain rather than distribute it immediately to a beneficiary. A net capital loss is carried forward and offset against the trust’s future capital gains.

If there is no beneficiary entitled to income (or specifically entitled to the capital gain) the trustee is taxed on the capital gain. In the situation where the trustee is taxed on trust net income at the top marginal rate, they are not entitled to the CGT discount on the gain.

Important to CGT is the notion of ‘absolute entitlement’. A beneficiary is ‘absolutely entitled’ to an asset of a trust if they have a ‘vested and indefeasible’ interest in the entire trust asset – in other words, they can direct the trustee to immediately transfer the asset to themselves or to someone else.

In the situation where a beneficiary is absolutely entitled to a trust asset, the asset is treated for CGT purposes as if it is owned directly by the beneficiary and not the trustee. Any actions taken by the trustee in relation to the asset are taken to have been done by the beneficiary directly. This means that if a capital gains tax (CGT) event happens in relation to the asset, any capital gain or loss will be made directly by the beneficiary and doesn’t form part of the trust’s net income.

There is also the notion of ‘specific entitlement’. In this situation, a capital gain can be streamed to a particular beneficiary by making them specifically entitled to the gain. In such cases, the capital gain is calculated for the income year with the benefit of any discounts or concessions to which they are entitled.

Tax returns and tax payments

The trustee is required to lodge a trust income tax return, irrespective of the amount of net income involved, unless advised otherwise by the ATO. If the trustee is liable for tax, they will receive an income tax assessment as trustee; this is separate to their own assessment as an individual or corporate tax entity.

The beneficiaries (or the trustee when assessed on their behalf) may have to pay regular tax instalments based on their share of the trust’s instalment income.

Advantages and disadvantages of trusts

The following details some of the advantages and disadvantages of the trust structure but is not an exhaustive list. Specific client circumstances could impact whether certain trust features are advantageous or disadvantageous.

Family trusts

A family trust is a popular legal structure primarily used to manage and protect family wealth, distribute income and for tax planning. When a trust makes a ‘family trust election’, it is recognised as a family trust; this confers certain tax advantages but also specific tax obligations.

How a family trust works

A family trust is typically discretionary, meaning the trustee has the power to decide how to distribute income and capital among the beneficiaries. The beneficiaries are often members of the same family, and their entitlement to distributions is at the trustee’s discretion. This flexibility allows for strategic financial planning, especially in terms of managing tax liabilities.

To establish a family trust, the trustee can be an individual or a corporate entity. Many families prefer appointing a corporate trustee for reasons such as asset protection, limited liability and succession planning. The trust itself is governed by a trust deed, which outlines how the trust will be managed, who the beneficiaries are and how distributions will be made.

The family trust election is a key aspect of this structure. It is a formal declaration made to the ATO that qualifies the trust for specific tax concessions, particularly related to the trust loss provisions. However, this election also means that any distribution made to individuals or entities outside the ‘family group’ may trigger the Family Trust Distribution Tax (FTDT). This tax is levied at the highest marginal rate plus the Medicare levy, making it a significant cost if the trust does not stay within its family group for distributions.

Why use a family trust?

The most common reasons for setting up a family trust include:

• Asset protection: by holding assets in a trust, families can protect them from potential creditors or legal claims against individual family members. If a family member faces financial difficulties, the assets held by the trust are not considered part of their personal estate which provides a level of legal insulation.
• Tax planning: family trusts offer considerable flexibility when it comes to tax planning. By distributing income to beneficiaries with lower marginal tax rates, families can minimise the overall tax burden. For example, a trustee might allocate more income to a beneficiary who earns less or is not employed.
• Investment and business planning: many families use trusts to hold investments or business assets. For instance, if a family trust owns a commercial property, the rental income can be distributed in a tax-efficient way. Family businesses are often structured as trusts, offering both asset protection and tax benefits.
• Succession planning: a family trust can be an effective tool for estate and succession planning. Rather than transferring assets directly to heirs, which could trigger capital gains tax (CGT) or stamp duty, the assets remain in the trust, allowing beneficiaries to continue to enjoy the benefits, such as income from shares or property investments.

Advantages and disadvantages of family trusts

As with trusts more generally, specific client circumstances could impact how advantageous or disadvantageous certain family trust features are

Family trusts are an effective tool for tax planning, asset protection and succession planning. They give trustees the flexibility to manage income distributions in a tax-efficient manner and offer advantages that other structures may not. However, family trusts can also present challenges, particularly when it comes to tax obligations, potential family conflicts and handling undistributed income. To ensure the trust meets its objectives and adheres to legal regulations and tax obligations, careful planning and management are crucial.

Testamentary trusts

A testamentary trust is established through a will and only comes into effect after the will-maker, or testator, has passed away. Its main function is to control how assets from the deceased’s estate are distributed to beneficiaries.

Unlike a standard bequest where assets are handed directly to the heirs, a testamentary trust holds these assets in trust, with the trustee responsible for managing and distributing them according to the terms of the will. This structure provides certain legal, financial and tax advantages that make it an attractive option for estate planning.

How does a testamentary trust work?

The creation of a testamentary trust occurs upon the death of the testator and after the estate administration has been completed. Assets from the estate are transferred into the trust, and the trustee manages them for the benefit of designated beneficiaries. These beneficiaries can include minor children, family members with specific needs, or even individuals who require financial protection.

Testamentary trusts can be either fixed or discretionary. In a fixed trust, the amount each beneficiary receives is predetermined. A discretionary testamentary trust more commonly used because it provides the trustee with the flexibility to distribute income and capital among beneficiaries based on their needs and tax circumstances. This flexibility makes discretionary trusts particularly useful for tax planning purposes.

Why use a testamentary trust?

Testamentary trusts are primarily used to manage how assets are distributed to beneficiaries after death, but they serve several key purposes:

• Tax efficiency: testamentary trusts can provide significant tax advantages, particularly when distributing income to minors. Normally, income distributed to children under the age of 18 is taxed at penalty rates to prevent parents from diverting income to lower-tax-rate children. However, testamentary trusts are an exception to this rule and minors who receive income from a testamentary trust are taxed at adult tax rates, which are typically much lower, and use can be made of the tax free threshold. This provision allows families to reduce the overall tax burden on estate income and improve tax efficiency across family members.
• Asset protection: a testamentary trust can protect estate assets from creditors, legal disputes and family law claims. Because the beneficiaries do not have direct ownership of the trust’s assets – only an entitlement to income and distributions determined by the trustee –those assets are often shielded from legal action taken against the beneficiaries, such as bankruptcy or divorce settlements.
• Control over asset distribution: testamentary trusts allow the testator to retain control over how and when assets are distributed to beneficiaries. This is particularly useful for ensuring that minors or financially irresponsible heirs do not receive large sums of money all at once. The trust can specify conditions for when beneficiaries can access their inheritance, such as reaching a certain age or meeting particular milestones, such as completing tertiary education.
• Long-term estate management: where the estate includes significant assets that require ongoing management, such as investments or property, a testamentary trust can ensure these assets are managed professionally and in the best interests of the beneficiaries. The trustee – who may be a family member, professional adviser or financial institution – oversees the investment and distribution of trust assets in accordance with the testator’s wishes.

Tax effectiveness

One of the most compelling reasons to establish a testamentary trust is the tax efficiency it can offer. Testamentary trusts allow for income splitting among beneficiaries, particularly those in lower tax brackets, thereby minimising the overall tax paid on estate income. By distributing income to beneficiaries based on their personal tax rates, the trustee can reduce the tax burden on the estate.

As indicated above, a notable tax advantage of a testamentary trust is the concessional treatment of income distributed to minors. Normally, income received by minors from trusts is taxed at penalty rates; however, income distributed to minors from a testamentary trust is taxed at the same rates as adults, which allows families to make use of lower marginal tax rates to their advantage. This can significantly reduce the tax on income derived from assets within the trust, such as rental income or investment returns.

However, it’s important to note that tax concessions are limited to income generated by assets directly transferred into the trust from the deceased’s estate. Income from assets introduced to the trust from external sources, such as gifts or loans, does not qualify for these tax benefits and will be taxed at the higher penalty rates for minors.

Advantages and disadvantages of testamentary trusts

As with trusts more generally, specific client circumstances could impact how advantageous or disadvantageous certain testamentary trust features are.

Testamentary trusts offer a powerful tool for estate planning, particularly for families looking to protect assets, provide for future generations and optimise tax outcomes. However, they require careful planning and consideration to ensure that they are the right solution for each particular family’s needs.

All trusts come with significant legal and tax obligations that must be carefully managed. Trustees have a fiduciary duty to act in the best interests of the beneficiaries, while beneficiaries have an obligation to report their share of the trust’s income for tax purposes. In the event a client wishes to establish a family or testamentary trust, the decision should always be guided by your professional advice – or that of other specialists you may call on – to navigate the complexities and ensure compliance with legal and tax requirements.

———–

Notes:
[1]  ATO, Deceased Estates
[2] ATO, Inherited Property and CGT

The post Tax and Trusts appeared first on AdviserVoice.

Tax, as it pertains to deceased estates, involves certain steps that clients need to take to finalise tax matters for family members or, in some cases, advisers for their clients.

Everyone knows the famous Benjamin Franklin quote about death and taxes, but not everyone is aware that tax obligations continue after death. This article, proudly sponsored by Allianz Retire+, examines these obligations and other tax matters that affect a deceased estate.

In the last article in this series, we examined Estate planning and tax and the measures clients can consider when preparing their estate, particularly as it relates to minimising tax for beneficiaries. However, while it might be expected that tax obligations effectively end with death, that is not the case. And, while Australia has not had a formal inheritance tax (in the form of death duties) since 1979, bequests are not always received tax free.

Death and tax – obligations

The ATO works on the assumption that a deceased estate will continue to earn income after death. This income might arise from interest, dividends or rent from property investments. It’s a requirement that any tax obligations are finalised before the assets of an estate are distributed.

If a client is administering an estate, they need to understand their obligations under tax law. These are to^[1]:

• notify the ATO of the death so it ceases any correspondence re tax matters
• determine whether they need a grant of probate or letters of administration.

One of these court-issued documents is required to be considered the authorised legal personal representative (LPR) by the ATO, and thereby be granted full authority to manage the deceased’s tax affairs and have unrestricted access to ATO-held information and assets of the estate.

One of these documents is generally required to manage other aspects of a deceased estate; this may vary according to law in the relevant state or territory.

• The ATO must be notified as to who is managing the estate; this is done by submitting an official notification of death. The ATO will add the LPR’s name to the estate’s records.
• If the deceased person’s tax affairs included running a business, business tax obligations must be managed.

If the deceased person was a sole trader or in a partnership, a final business activity statement (BAS) for the last tax period may need to be lodged. This is usually the quarter in which the person died and the period ends the day before their death. Any outstanding BAS will need to be lodged and tax paid.

Goods and services tax (GST) and capital gains tax (CGT) may apply to the sale of any assets used in the business.

• check to see whether a final tax return for the deceased needs to be lodged. This is called a ‘date of death’ tax return and covers the income year in which the person died, up to the date of death.

A date of death tax return must be lodged if any of the following applied to the deceased in the income year in which they died:

• they had tax withheld from their income, including from interest, dividends or rent
• their taxable income was above the tax-free threshold
• they lodged tax returns in the income years before their death or have outstanding tax returns.

The deceased’s date of death tax return should include:

• any salary earned up to the date of death
• investment income earned up to the date of death
• capital gains where the agreement to sell was made prior to death
• any taxable superannuation income received up to the date of death.

Any outstanding tax returns must also be lodged and where applicable, tax paid to the ATO.

If a date of death tax return is not required, a non-lodgement advice form must be completed and provided to the ATO.

• Tax returns for the deceased estate, called a trust tax return, must be lodged for each year. This traverses the income year in which the individual died, through to the year the estate is finalised, and assets distributed to beneficiaries. The first income year of a deceased estate starts the day after the date of death and ends on the following 30 June.

The trust tax return should include:

• any salary earned after death
• investment income after death; this should include income earned from assets such as dividends, interest or rent
• capital gains on assets sold by the estate
• deductions for expenses incurred by the estate related to earning income.

The deceased estate is deemed to be a separate entity to the deceased individual, hence the need for separate tax returns.

You can lodge a trust tax return even if it is not required. For example, your client may wish to lodge a return to claim franking credits on dividends paid to the estate.

A note on capital gains and losses; capital gains are still taxable after death, but capital losses die with the deceased. In the event a client’s death is anticipated, a strategy to sell assets carrying unrealised gains to use capital losses being carried by the client might be considered.

Death and the family home

Although Australia officially abolished death duties in 1979, the family home is a substantial asset in most estates and one that may attract capital gains tax (CGT). Its tax treatment is dependent on several factors, the most important being whether the home is a pre-CGT asset (bought prior to 20 September 1985) or acquired after that date. Other impacts arise from whether the home is covered – in full or in part – by the main residence CGT exemption, and how the title is held.

If the deceased purchased the property before 20 September 1985 and is inherited after this date, the property is valued at its market value at the date of death of the property owner and beneficiaries generally have two years to sell the property to qualify for a CGT exemption.

If the home is a post-CGT asset, the beneficiaries inherit the property at market value at the date of death if it is covered by the main residence exemption at the time of death. ​The main residence CGT exemption applies if^[2]:

• the home was the deceased’s main residence before death and was not being used to produce income, and
• the home was sold and settled within two years of the person’s death (although this timeframe can sometimes be extended at the discretion of the ATO), or
• from the deceased’s death until disposal, the dwelling is not used to produce income and is the main residence of one or more of:
  • the spouse of the deceased immediately before the deceased’s death,
  • an individual who had a right to occupy the dwelling under the deceased’s will, and
  • a beneficiary, if disposing of the dwelling as a beneficiary.

If the property is not or only partially exempt from CGT, the beneficiary needs to know its cost base to determine the capital gain. If the property is partially exempt from CGT, the beneficiary needs determine the proportion of the property that is exempt.

In the case where land was purchased before 19 September 1985, but a home built on the property after that date, the property is treated as two separate assets; the land is treated as a pre-CGT asset and the home as a post-CGT asset.

Ownership through company or trust

If a client owns (or inherits) a home through a company or trust, death does not affect the ownership of the home – the entity that owns the home has not died. If the deceased holds units in a trust or shares in a company that owns the home, the estate has to manage the ownership of those units or shares. Where clients have a company or trust, their estate planning should include the transfer of those units or shares.

It’s important to know that holding the family home in a company or trust will prevent your clients’ estate from benefiting from the main residence CGT exemption.

Death and super

Like the family home, superannuation is often a major estate asset…however, super death benefits don’t automatically form part of a deceased member’s estate. This is because super isn’t considered to be a personal asset that’s owned in the client’s own name; it’s held in trust by the super fund’s trustees.

In the majority of cases, the super fund’s trustees pay the death benefits directly to the deceased’s dependants or beneficiaries as defined in a binding death benefit nomination. In this case, those death benefits do not form part of the estate.

In some cases, the fund trustees may pay the death benefits, in full or part, to the estate’s executor, in which case the superannuation death benefits do form part of the estate and are distributed in accordance with the deceased’s will. Clients may make a valid binding nomination in favour of the estate rather than individual/s if they wish their super death benefit to form part of their total estate.

The distribution of super death benefits depend on a number of factors: the terms of the fund’s trust deed, applicable legislation and any valid beneficiary nomination made by the deceased.

Superannuation lump sum death benefits are tax free if paid to a “death benefits dependant” for tax purposes. A “death benefits dependant” is defined as:

• the deceased persons current or ex-spouse or de facto spouse
• the deceased persons child aged under 18 years of age
• any other person with whom the deceased had interdependency relationship.

Any other person who the deceased person had an interdependency relationship with just before they died, or anyone dependent on the deceased person just before their death is also considered to be a “death benefits dependant”.

The definition of a “death benefits dependant” under taxation law (in other words, who can receive a tax free death benefit) is slightly different to the definition of a “dependant” under superannuation law.

If superannuation death benefits are paid directly by the super fund trustee to a dependent who is not considered a death benefits dependent (e.g. a child over 18 who was not financially dependent on the deceased at the time of death), the trustee is responsible for calculating and withholding any applicable superannuation death benefits tax from the payment.

The tax on a super death benefit depends on:

• whether the recipient was a dependant of the deceased under tax law
• whether it is paid as a lump sum or income stream
• whether the super is tax-free or taxable
• the recipient’s age and the age of the deceased person when they died (this is relevant to income streams).

Tax is only paid on the taxable component of the benefit; money contributed as concessional contributions and fund earnings. Non-concessional contributions comprise the ‘tax-free’ component. If tax does apply, it is levied at a maximum of 17% (15% plus Medicare levy). If the deceased was under 65 at the time of their death, some of the taxable component may be taxed at a rate up to 32% (including Medicare levy).

In the situation where death benefits are paid to the legal personal representative (such as the executor), the trustee does not deduct tax. Instead, they provide the estate’s representative with a statement detailing the taxable components of the payment. It is then the responsibility of the legal representative to pay any super death benefits tax from the estate before it is distributed.

If superannuation death benefits are paid to the legal personal representative and then to a death benefits dependant, no tax will be payable.

Self-Managed Super Funds

For those clients with an SMSF, consideration needs to be given to who will control their SMSF when they die. This is because the person in control of the SMSF may, subject to any binding death benefit nomination, have the ability to deal with the deceased member’s death benefits as they choose.

When creating an estate plan for clients with an SMSF, it is important to:

• ensure the estate plan transfers control of the SMSF, including the power to pay death benefits, in line with the client’s wishes
• consider whether a binding death benefit nomination should be made.

When an SMSF member dies, the SMSF generally pays a death benefit to a dependant or other beneficiary of the deceased.

If the death benefit is paid as a lump sum to a death benefits dependant of the deceased, it’s tax free and not considered assessable or exempt income. The SMSF doesn’t withhold tax from the payment and the recipient don’t include it in their income tax return.

If the death benefit is paid as an income stream and is paid to a non-dependent or the trustee of a deceased estate, there may be tax to pay. The SMSF will need to determine the taxed and untaxed elements of the benefit, calculate the applicable tax and, if appropriate, withhold tax from payments.

Bequests and tax

While there may be no inheritance taxes in Australia, beneficiaries may have tax obligations for the assets they inherit. Capital gains tax may apply if a client disposes of an asset inherited from a deceased estate (but not the family home if disposed of within two years).

Income producing assets, such as cash, shares and property attract no tax on the value of the asset itself, only on the income derived from it. If a client inherits shares, they will be required to pay tax on the dividends received. Similarly, inherited property attracts income tax on rental income and cash on interest income. Tax payable is generally calculated from the date of death of the person bequeathing the asset.

Dealing with a deceased estate is much more than simply dividing up assets. Clients preparing their estate – or preparing to administer an estate – need to be aware of the myriad of obligations that follow death. A sound estate plan, with thought given to the administration of that asset and taking measures to minimise the tax liabilities for beneficiaries can smooth the process for intergenerational wealth transfer. The Productivity Commission’s 2021 report highlights an expected A$3.5 trillion intergenerational asset transfer in Australia by 2050, making estate and related tax planning an integral part of the advice process.

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Notes:
[1]  ATO, Deceased Estates
[2] ATO, Inherited Property and CGT

The post Deceased estates and tax appeared first on AdviserVoice.

What are the tax consequences that flow from estate planning?

Estate planning is a fundamentally important aspect of financial (and legal) management – and has important tax consequences. This article, proudly sponsored by Allianz Retire+, examines some of the elements of estate planning and the tax consequences of each.

Estate planning is often viewed as a way to ensure that assets are distributed according to one’s wishes after death, but its significance extends beyond that. One of the most critical yet frequently overlooked aspects of estate planning is its role in effective tax management. Properly structured, an estate plan can help individuals and families navigate the complexities of wealth transfer, minimise tax payable by beneficiaries, consider any social security impact and ensure that a financial legacy is passed on efficiently.

To this end, estate planning is as relevant for a business as for individuals. For without thoughtful tax planning, a significant portion of an estate (business or personal) can be eroded by taxes, leaving beneficiaries with far less than intended.

When working with clients on estate planning, there are several important things to bear in mind.

Firstly, estate planning laws vary by state; therefore it’s important to understand the law as it pertains to your (and your client’s) locale.

Secondly, an estate lawyer is best placed to advise on and create relevant estate planning documents; this includes the Will and any Powers of Attorney.

Finally, your client’s circumstances may change, so the estate plan should be regularly reviewed to ensure that it’s up-to-date and reflects any changes to their personal situation. A marriage or divorce, the purchase or sale of a business, births and deaths…each of these events can necessitate a review of a client’s estate plan.

Ultimately, an effective estate plan will ensure that the ownership of assets passes to the correct beneficiaries, any payable tax is minimised, and the assets are protected if there is a legal dispute.

Key components of an estate plan

A comprehensive estate plan encompasses several elements to ensure your client’s wishes are honoured and their assets effectively managed:

• Will – the foundation of any estate plan, the Will details how your client’s assets should be distributed after death. It also designates an executor responsible for administering your client’s estate according to their specified wishes.
• Super – your client needs to make binding death nominations for super. The allocation of super is managed by the fund’s trustee and can’t be distributed via a client’s will. Binding and non-binding super beneficiaries will receive any unspent super money from the trustee.
• Power of Attorney – this allows your client to appoint a trusted individual to manage their financial and legal affairs in the event they become unable to do so themselves. An Enduring Power of Attorney is a specific type of POA that remains in effect if the client becomes incapacitated or unable to make decisions.
• Enduring Guardianship – in some jurisdictions, a medical Power of Attorney is granted, in others, an Enduring Guardianship grants a designated person the authority to make decisions regarding your client’s health and lifestyle if they become unable to do so.
• Advanced Care Directive – sometimes referred to as a Living Will, this document enables your client to outline their preferences for medical treatment and end-of-life care in situations they are unable to communicate their wishes.
• Trusts – a legal arrangement in which a trustee manages assets on behalf of beneficiaries, with distribution occurring at a predetermined time. Trusts can offer tax advantages and protect assets; an example is the establishment of a trust for a child that becomes accessible at a specific milestone birthday or other point in time.

All legal documents are best created by an estate lawyer. There are also a range of legal implications to consider:

• All estate planning documents must meet the legal requirements for validity. This includes compliance with relevant legislation, which varies by state or territory.
• Understanding the tax consequences of asset transfers is an essential part of estate planning. You need to consider capital gains tax, stamp duty and income tax, each of which can significantly impact the value of assets passed to beneficiaries.
• Legal capacity is important to avoid potential challenges to the Will in the future. Your clients need to create a Will at a time they have the legal capacity to do so. No-one expects to lose capacity, but steadily increasing dementia rates means that statistically, it’s likely it will affect some of your clients (note: it is estimated that more than 421,000 Australians are living with dementia in 2024, a figure likely to rise significantly without medical breakthrough)^[1].

The Will

The Will is the cornerstone of estate planning. It serves as the primary legal document that outlines how a client’s assets should be distributed upon death, or in some cases, permanent incapacitation.

A Will ensures that your client’s wishes are clearly stated and legally enforceable, helping to avoid potential disputes among beneficiaries.

The functions of a Will include:^[2]

1. Appointing someone to administer the estate after death
2. Recording how assets are to be distributed after death
3. Fulfilling financial responsibility after death – discharging debt and looking after dependents
4. Revoking/cancelling old wills
5. Establishing a trust for beneficiaries

A Will plays other important roles. It enables clients to appoint a guardian for minor children, name an executor to manage their estate and make specific bequests to individuals or charities. By formalising these decisions in a Will, your client takes control of their legacy.

Clients may hold two types of assets: estate assets and non-estate assets. The former includes any asset the client owns in their own name. Non-estate assets include those owned as a joint tenant, in a trust or in superannuation. Life insurance is also generally disposed of according to specific rules and not distributed via the Will.

Without a Will, a client’s estate may be distributed according to state intestacy laws, which may not align with your client’s preferences. In the case of intestacy, there’s a risk that the undocumented intentions of the client in relation to their estate may not be acted on. Further, depending on the marginal tax rates of the beneficiaries, intestacy can lead to an imbalance in the distribution of an estate due to higher rates of tax payable by some beneficiaries.

Intestacy can also reduce the size of your client’s estate thanks to other charges; administering an estate is more expensive when outside parties must be involved and compensated for their services. The family can generally expect to pay the government more revenue, in the form of legal and other fees, capital gains tax and income tax.

Powers of Attorney

While a Power of Attorney (POA) won’t impact the tax implications of estate planning, it’s good form for clients to nominate a power of attorney while they are preparing their Will. As with Wills, each state has its own legislation in respect to POAs.

A POA is a separate legal document which enables your client to appoint one or more people to manage their financial and legal decisions on their behalf while they are alive. A POA ceases upon death.

An Enduring Power of Attorney (EPA) can be used to make decisions for your client in the situation they are unable to do so, if for example, they lose capacity. An attorney is legally required to act in your client’s best interests; therefore, the appointment of a trusted person to as POA can ensure your client’s affairs are managed as they would like them to be in the event they become incapacitated before death.

An EPA is of particular importance to clients with a self-managed super fund. Regulations require all members of an SMSF to be trustees, but a person without capacity is prohibited from being a trustee. In the situation where a trustee of an SMSF loses capacity – whether your client or a non-client member of a client’s SMSF – decisions about the SMSF would have to be made by a tribunal if there is no EPA in place for that member. It’s good form to ensure that all SMSF clients have EPAs in place – and that all members of their SMSFs do too.

Superannuation

As a non-estate asset, superannuation is treated differently to other investments. Because it’s managed by the trustee of your client’s fund, it can’t be incorporated into or distributed by their will.

There are four important considerations when estate planning for client’s superannuation^[3].

1. When a super fund’s member dies, the money is paid out of the fund
2. Only certain people (i.e. nominated beneficiaries) are eligible to directly receive a superannuation death benefit
3. Insurance proceeds inside a super fund may be heavily taxed on the member’s death
4. In some circumstances, there can be a death tax on super; there are strategies to minimise this or for beneficiaries to avoid becoming eligible to pay it.

Your client needs to nominate superannuation beneficiaries who will receive any remaining super once your client passes away. There are two types of beneficiaries: binding and non-binding beneficiaries.

A binding death benefit nomination is a written declaration your client provides to their fund. This provides a legal obligation for the trustee to distribute your super to those people nominated by the client. Binding nominations are generally required to be validated every three years to remain binding.

A non-binding nomination is the preferred choice of beneficiary that your client selects, the difference being that the super trustee is not obligated to follow it. When distributing your remaining super, the trustee will take your non-binding nomination into account, along with the claims of other dependants.

In both cases, trustees must follow the relevant super laws. Beneficiary nominations are made available so clients have the opportunity to legally ensure their chosen beneficiaries receive payment, even where there may be claims over your client’s estate after their death.

When it comes to super and tax, there’s a difference between SIS-dependent beneficiaries and tax-dependent beneficiaries; in super law it defines who can receive death benefits, in tax law, if and how a recipient will be taxed.

A SIS-dependent beneficiary indicates the beneficiary meets the rules to receive the death benefit under the SIS Act 1993.

A tax-dependent beneficiary includes a former spouse and children under 18. They can generally receive death benefits tax-free. Non tax-dependents, including adult children, pay tax on the taxable component of any death benefit received from their parents’ super.

A client can nominate an eligible dependant, such as their spouse, to continue receiving an income stream rather than a lump sum payment. This is called a reversionary pension and only applies to super savings already in pension mode.

From a tax perspective, there are several benefits:

• A super pension is generally tax free or in some cases, concessionally taxed, depending on your client’s age and the age of their beneficiary. Consequently, there may be tax benefits for the reversionary beneficiary.
• Because the assets supporting the pension payments remain within the super system, they continue to benefit from super’s lower tax environment.
• When the reversionary pension reverts to the beneficiary, the taxable and tax-free components that were calculated when the pension first started are preserved.

Where life insurance is held within super, any proceeds are paid as part of the superannuation death benefit to beneficiaries. As such, tax will be payable by those beneficiaries who are not tax-dependents.

Testamentary Trusts

A testamentary trust can play a major role in the estate planning process and is usually created when your client drafts their Will. It is written into the client’s Will and is dormant until the client’s death.

Administered by a trustee, a testamentary trust enables your client to leave money to beneficiaries who have use of that money – often subject to certain conditions – but it’s not their own property. This is a strategy commonly used to provide protection against relationship breakdowns, creditors, poor decision making and potential legal issues.

Clients may consider a testamentary trust in circumstances such as:

• They wish to protect their assets for future generations. For example, your client’s beneficiaries can benefit from assets such as an investment portfolio or family business, while the trustee controls how they’re managed. In this scenario, the assets are protected from potential legal action or actions of individual beneficiaries that could otherwise impact them.
• A client has a blended or complex family structure. Numerous scenarios can be modelled by the trustee to preserve assets or to ensure the relevant beneficiaries can access assets in the trust if others pass away.
• Your client needs to protect vulnerable beneficiaries, such as a disabled child. A trust can ensure they don’t lose this inheritance to creditors or that funds are used in their best interests. For those with young children, a trust can hold assets and/or manage assets until the children are old enough to do so themselves.
• Depending on assets held, a testamentary trust can provide tax benefits for your beneficiaries.

From a tax perspective, income generated by a testamentary trust is taxed at the marginal tax rate of the beneficiary of that trust. A testamentary trust also facilitates income splitting, where a beneficiary can allocate trust income to other beneficiaries. This strategy enables beneficiaries with lower marginal tax rates to receive income and pay tax at their lower rate.

Further, minors (children under 18) who receive ‘unearned income’ are generally taxed at the highest marginal tax rate (although the first $416 is tax free). This is not the case with income received from a testamentary trust. Tax law provides that income and capital gains derived by children under age 18 from assets received from a testamentary trust are ‘excepted trust income’ and taxed at normal adult marginal rates.

This means a minor receiving income from a testamentary trust has a tax-free threshold of $18,200 before being taxed at the usual adult marginal rate, depending on the level of income. Imputation credits relating to franked dividends received can be used by the minor.

One of the main advantage of using a testamentary trust for bequeathed assets is that income, capital gains and franked dividends can be distributed among your client’s family beneficiaries each year in the most tax-efficient way.

A major part of estate planning is considering the tax implications for client’s beneficiaries and minimising the tax on their estate. Capital gains is triggered when an asset is sold or gifted. The ATO deems any gift your client makes as a sale at the current market value.

Therefore, good record keeping is essential. For example:

• Knowing what assets were acquired pre-CGT and which may attract capital gains tax.
• Is the family home a pre or post-CGT asset and would it be wholly or partly covered by the main residence CGT exemption?
• Most clients can reduce taxable capital gains by claiming expenses but require records to substantiate any such claims.
• Assets acquired pre-CGT (prior to 20 September 1985) may not be subject to capital gains, however your client needs records to prove the asset is a pre-CGT asset.
• Changes to holdings in shares and managed funds that might arise because of dividend reinvestment, merger and acquisition activity, bonus issues and so on. Again, knowing which are pre and post-CGT holdings is important.

Estate planning is a vital process that goes beyond simply dictating the distribution of assets after death; it plays a critical role in tax management, asset protection and ensures that your clients’ wishes are fully honoured. By carefully considering the various components of an estate plan, your clients can ensure that their financial legacy is preserved, tax liabilities are minimised, and their loved ones provided for according to their intentions.

As personal circumstances evolve, it’s crucial to regularly review and update your clients’ estate plans to reflect any changes. By doing so, your clients can mitigate risks such as disputes, unnecessary taxes or the unintended consequences of intestacy. Estate planning is not a one-time task but an ongoing process that ensures peace of mind for your clients and their families, securing their financial legacy for generations to come.

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Notes:
[1] https://www.dementia.org.au/about-dementia/dementia-facts-and-figures
[2] Wills, death and taxes made simple, Noel Whittaker, 2024
[3] Ibid

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What is on the ATO’s hotspot list this year?

Every Tax Time, the ATO focusses on certain hotspots where taxpayers are prone – either accidentally or deliberately – to make errors.

So, what is on the ATO’s list this year? Expect them to be looking in particular at:

• record-keeping
• work-related expenses
• rental property income and deductions
• sharing economy income, and
• capital gains from crypto assets, property, and shares.

Let’s take a look at each of those areas in turn in an attempt to understand why they receive so much attention from the ATO.

Work-related expenses

The ATO recently claimed that there was an $8.7 billion shortfall between the tax individuals are expected to pay and the tax they actually are paying. The ATO believes that work-related expenses claims are the biggest element in that “tax gap” and have signalled that they’ll be looking closely at these deductions this year. Expect them to focus in particular on:

• Deductions for working from home expenses. The way these could be claimed changed last year, with the introduction of a new 67 cents per hour fixed rate and enhanced substantiation requirements. We expect the ATO to check claims thoroughly, particularly to verify whether taxpayers have a record of all their working from hours over the entire tax year, in the form of timesheets, a diary or copy of work rosters.
• Similarly, in relation to working from home, deductions for “occupation” costs like rent, rates and mortgage interest are under the spotlight as they are not allowable unless you’re actually running a business from home.
• Mobile phone and internet costs, with a particular focus on people who are claiming the whole (or a substantial part) of the bill for their personal mobile as work-related and people who are potentially “double dipping” (ie, claiming the 67 cents per hour working from home rate – which includes an element for mobile phone costs – as well as claiming their mobile costs separately).
• Claims for work-related clothing, dry cleaning and laundry expenses
• Overtime meal claims
• Union fees and subscriptions
• Motor vehicle claims where taxpayers take advantage of the 85 cent per kilometre flat rate available for journeys up to 5,000kms (the ATO is concerned that too many taxpayers are automatically claiming the 5,000km limit regardless of the actual amount of travel)
• Incorrectly claiming deductions under the rule that allows taxpayers who have incurred work-related expenses of $300 or less in total to make a claim without receipts (the ATO believes that some taxpayers are claiming this – or an amount just less than $300 – without actually incurring the expenses at all).

H&R Block’s top tip before making any claim is to be confident that you understand what you can and can’t claim and that you have the necessary proof (invoices, receipts, diaries, etc) that you actually incurred the expenditure (look at the first focus area – record keeping!) and that it was work or business related.

Property spotlight

The other main focus this year is on people who make deduction claims in relation to investment properties and holiday homes. The ATO recently announced that in a series of audits, they found errors in 90% of returns reviewed. So, this year, expect them to focus on the following:

• Excessive interest expense claims, such as where property owners have tried to claim borrowing costs on the family home as well as their rental property.
• Incorrect apportionment of rental income and expenses between owners, such as where deductions on a jointly owned property are claimed by the owner with the higher taxable income, rather than jointly.
• Holiday homes that are not genuinely available for rent. Rental property owners should only claim for the periods the property is rented out or is genuinely available for rent. Periods of personal use can’t be claimed.
• Incorrect claims for newly purchased rental properties. The costs to repair damage and defects existing at the time of purchase or the costs of renovation cannot be claimed immediately. These costs are deductible instead over a number of years.

The key tip from H&R Block is to ensure that property owners keep good records (which ties into the first of those focus areas again!). The golden rule is; if you can’t substantiate it, you can’t claim it, so it’s essential to keep invoices, receipts and bank statements for all property expenditure, as well as proof that your property was available for rent, such as rental listings.

Sharing economy

The ATO is convinced that many people in the sharing economy are not properly declaring their profits and gains. So, if you obtain work through Uber, Airtasker or any of the many sharing economy platforms which allow you to rent out assets or your personal services, take heed. The ATO is now receiving reports from many platforms (including Uber), which it can use to highlight data mismatches.

Similarly, if you rent out a property (or part of one) through Airbnb and Stayz, you will be under the spotlight. The ATO has numerous third-party sources of data which it can use to identify if you are receiving rent and they are on the look-out for mismatches with the tax return data that you report.

Cryptocurrency

The ATO will also be taking a closer look at the booming market in investments in cryptocurrencies like Bitcoin. Increasing numbers of taxpayers are jumping on the bandwagon and the ATO believes that some of them are failing to declare the profits (and in some cases the losses) they are making on their investments. Remember, investing in cryptocurrencies can give rise to capital gains tax (CGT) on profits. Traders can be taxed on their profits as business income.

To help them in their search, the ATO is collecting bulk records from Australian cryptocurrency designated service providers (DSPs) as part of a data matching program to ensure people trading in cryptocurrency are paying the right amount of tax. Data provided to the ATO includes cryptocurrency purchase and sale information. The data will identify taxpayers who fail to disclose their income details correctly.

The ATO estimates that there are between 500,000 to one million Australians that have invested in crypto-assets.

Shares

When you dispose of shares, assuming you are an investor, not a trader, you will normally have to pay CGT on any profits.

Typically, CGT arises when you sell shares but can also happen if you give them away or you stop being an Australian resident. CGT taxes any increase in value from the time the share was acquired.

Sometimes the proceeds and cost base of the share are not what was actually paid and/or received, but rather, the market value of the asset. This is typically to prevent people from minimising their tax by, say, selling the share to a relative for a low price.

If you dabble regularly in buying and selling shares, you could be deemed a share trader, rather than a share investor. If that’s the case, the tax you pay could look very different.

A share trader is someone who buys and sells shares purely for short term profits. Signs that you’re a trader include:

• Lots of transactions
• A clear profit making intent
• You run your activities in a business-like manner (eg, a large investment of capital, a well-developed business plan, extensive research and properly maintained books and records).

Someone who buys and sells shares as part of a business will treat those shares as trading stock, and gains or losses on them will be taxed as ordinary income (effectively as business profits) rather than capital gains.

You can see from the above that there is ample opportunity to get the tax treatment wrong or mischaracterize income in a way that gives you a tax advantage, hence the ATO interest in this area.

Make sure that you have the necessary information about all your share sales so you can report this to the ATO. You’ll need details of the original purchase cost, the sales proceeds, the dates of acquisition and sale and any associated costs (eg, brokerage fees).

By Mark Chapman Director of Tax Communication

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