Lifeplan Education Investments Fund

Transcription

1 Lifeplan Education Investments Fund Essential Guide to Education Investment Funds Adviser Use Only December 2014 Everything you wanted to know about Lifeplan Education Investment Fund. Is the PDS FoFA compliant? The Lifeplan Education Investment Fund PDS dated 1 May 2012 (and SPDS dated 22 October 2012 and 20 March 2014) is FoFA compliant. Who are the parties to an education investment fund? Investor who makes all investment decisions multiple investors permitted. Plan Guardian provides certainty about who will look after the student interests if the investor dies or becomes intellectually disabled. Student intended recipient of education but has no control over the investment. Education investment funds are a form of life insurance policy the student is deemed to be the life insured and determines the maximum holding period of an education fund. Beneficiaries (optional) may receive the proceeds of a death claim the education investment fund becomes a non-estate asset and does not require probate for the distribution of benefits. Who can invest in an education investment fund? Anyone over the age of 16. Individual or multiple investors. Companies and trusts. How much can be contributed? The maximum contribution that can be made per student is currently $500,000. Limit is reviewed annually on 1 October. Does the 125% rule apply? No additional contributions can be made at any time provided the total contribution per student does not exceed the prevailing cap. How are education investment fund earnings taxed? Lifeplan pays the tax on annual investment earnings at the corporate tax rate currently 30%. However, this rate may be effectively less due to the use of allowable tax credits and benefits eg franking credits. An education tax benefit (ETB), representing tax paid at the corporate rate of 30%, is credited to the account twice yearly 30 June and 31 December. The ETB is only available when investor earnings are withdrawn to pay education expenses. Investors will not pay tax on the investment earnings while they remain invested. Why is knowing the purpose of withdrawal important? The Lifeplan Education Investment Fund allows investors to make both education and non-education withdrawals. The purpose of the withdrawal determines: Who is the taxable entity; How the withdrawal is assessed for tax purposes; and Whether the ETB is available. Lifeplan offers an Easy facility that aims to ensure that the potential for a tax liability is minimised. What are the education expenses that can be claimed? School related expenses including school fees, text books and uniforms and a broad range of additional education related expenses. A comprehensive listing of expenses is available on Lifeplan has the capacity to consider expenses that are currently not on our list of authorised expenses. It is recommended that the query is raised prior to incurring the expense.

2 2 How are education related withdrawals taxed? The student is the taxable entity. Easy process draws on investment earnings including the ETB up to the student tax threshold. Balance is withdrawn from contributions which are not taxable. Example A: $2,000 to pay school expenses Balance $15,000 + $2,800 + $1,200 = $19,000 Student under 18 Student 18 and over $1,584 Nil $291 $1,400 Tax Nil Nil Nil Nil Example B: $21,000 to pay education expenses $125 $600 $2,000 $2,000 Balance $50,000 + $25,000 + $10,715 = $85,715 Student under 18 Student 18 and over $20,584 $458 $291 $14,379 $125 $6,163 Tax Nil Nil Nil Nil $21,000 $21,000 Note: Calculations in examples A and B assume the student has no other taxable income and therefore drawings remain with the tax threshold and ensure no tax is payable. How are non-education related withdrawals taxed? The investor is the taxable entity. Easy process draws on contributions. Balance is withdrawn from investment earnings note ETB is not available for non-education related expenses. ATO IT2346 personal income tax is only payable on investment earnings if withdrawn often referred to as the 10 year rule as per the following table: Year Years 1 8 Year 9 Year 10 Year 11 onwards Taxable Component All earnings 2/3rds of earnings 1/3rd of earnings Nil A 30% tax offset applies to the taxable component of any withdrawal. Example C: $2,000 to pay for car repairs Balance $15,000 + $2,800 + $1,200 = $19,000 Investor $2,000 (Not available unless insufficent in Contributions Account) Not available $2,000 Tax Nil Nil Nil Nil Example D: All funds withdrawn in year 8 for non-education related expenses Balance $50,000 + $25,000 + $10,715 = $85,715 Investor $50,000 $25,000 Unclaimable $75,000 Tax Nil Bond Tax Rules Not available Not applicable

3 3 Does capital gains tax apply to education investment fund withdrawals? No education and non-education related withdrawals (including capital growth) of an education investment fund withdrawal are assessed at marginal tax rates. Non-education related withdrawals will attract a 30% tax offset in the first 10 years. Does tax apply when switching investment options? No personal tax is not payable when switching investment options. What is an adjustable taxable income (ATI)? Adjusted taxable income is a method of ensuring equity between those that can structure their financial affairs to reduce taxable income and those that cannot to ensure that an unfair advantage is not received. Adjusted taxable income generally includes: Taxable income; Reportable fringe benefits or adjusted fringe benefits; Reportable super contributions (salary sacrifice); and Total net investment losses. ATI has a number of variants and not all benefits, tax offsets and levies are assessed using the same methodology. What are the benefits and levies that are influenced by taxable/adjusted taxable income criterion? Senior Health Care Card. Low Income Tax Offset. Senior Australian and Pension Tax Offset. Medicare Levy and Medicare Levy Surcharge. Private Health Insurance Rebate. Family Tax Benefits. Baby Bonus. Schoolkids bonus. Parental Leave Pay. Dad and Partner Pay. Child Care Benefit. Low Income Superannuation Contribution Refund. Super Co-contribution. How does an education investment fund help with ATI? The annual earnings of an education investment fund are excluded from ATI calculations while funds remain invested. Should a non-educational withdrawal occur in the first 10 years, only the taxable component of the withdrawal will be included in an ATI calculation. Education withdrawals are taxable income of the student, not the investor. Having no or significantly reduced investment earnings contributing to ATI, may entitle an investor to receive a benefit and/or maximise entitlements. What are some of the strategies that an education investment fund can be utilised for? Wealth accumulators how even small contributions can ease the education funding burden in later years. Education and retirement funding how the competing demands of education costs can co-exist with retirement savings. Grandparents can lend a hand how grandparents can help but still ensure they have access to their own funds should the need arise. What is the Schoolkids Bonus? Eligibility is limited to those receiving Family Tax Benefit Part A. Legislation has passed to phase out Schoolkids Bonus payments. The Schoolkids Bonus will continue until the end of The last instalment will be paid in July The legislative change introduces an income test starting on 1st of January How does a tax paid return compare to a non-tax paid return? When comparing investment returns, it is important to consider the effect of tax on the return ultimately achieved by an investor. The following table compares a range of after tax investment bond returns (left hand column) to the before tax returns an investor would need if they paid the tax themselves.

4 4 Annual Tax Paid Return Marginal Tax Rate (excluding Medicare Levy) 19.0% 32.5% 37.0% 45.0% Equivalent Return required when tax is paid by the investor: 2.0% pa 2.5% 3.0% 3.2% 3.6% 3.0% pa 3.7% 4.4% 4.8% 5.5% 4.0% pa 4.9% 5.9% 6.3% 7.3% 6.0% pa 7.4% 8.9% 9.5% 10.9% 8.0% pa 9.9% 11.9% 12.7% 14.5% What is the difference between marginal tax rates (MTR) and effective/average tax rates? A strict definition is that MTR is the tax rate on the last dollar of income earned. Reality is that we have a tiered tax system which is a five tiered system. Effective Tax Rate is the average rate of tax that an investor pays. It is calculated by dividing their total tax liability by their taxable income. It is assumed that this hypothetical investor has no tax rebates/offsets to reduce their tax liability. Where they do, the tax liability figure in the calculation needs to be reduced for the rebates/offsets. Example: An investor with a taxable income of $175,000 excludes Medicare Levy: Has a MTR of 37.0% because every $1 they earn over $80,000 is taxed at 37.0%. The tax liability is $52,697. Dividing $52,697 by taxable income of $175,000 produces an effective or average tax rate of 30.1%. Does non-resident withholding tax apply? Generally no. An investment return from an education investment fund is generally treated as a reversionary bonus for tax purposes. Currently, this type of bonus is not among the classes of income (such as interest, dividends, royalties, trust income, etc) that requires a withholding deduction prior to payment to a non-resident investor. Accordingly, unless the Tax Commissioner specifically directs a life insurer to withhold an amount from a particular investment payout, non-resident withholding tax is current not applicable. Can overseas investors purchase an education investment fund? The fund s Product Disclosure Statement (PDS) can only be issued to people within Australia so provided the investor is in Australia at the time of applying, they can invest. Australians living offshore may invest provided they were in Australia at the time of receiving the PDS; Can investors/owners be changed? Yes ownership of an education investment fund can be changed via a process called assignment. Provided an assignment is done as a gift, it does not create a personal tax consequence for the original investor and the subsequent investor inherits. The new investor/owner inherits the original start date of the investment for non-education related tax purposes. Can the student be changed? Yes the student can be of any age and changed at any time. Only one student per policy permitted. This feature is quite different from an investment bond. Is there a relationship requirement between the investor and student to be able to use a beneficiary nomination? No this is different from an investment bond. Who can be a beneficiary? Anyone can be a beneficiary individuals, companies, trusts and charities. No age restriction. No family or interdependent relationship required insurable interest is no longer a necessity.

5 5 What are the estate planning features? Tax free lump sum proceeds paid to the nominated beneficiaries or to the estate where no valid nomination has been made. Proceeds are paid to the nominated beneficiary only after the nominated student dies after the death of the investors What happens to an education investment fund if the child dies? Any residual balance is paid to the investors. Alternatively, the education investment fund can continue with another student nominated. What happens to an education investment fund if the investor dies or becomes intellectually disabled? The investment will continue for the benefit of the student. Ownership responsibility is passed to the Plan Guardian (if nominated) or the legal representative, or in the event of death, the Executor of the investor s estate. A Plan Guardian does not have to be the same as the legal guardian of the student. What can a Plan Guardian do? A Plan Guardian is permitted: To make withdrawals for education related expenses for the benefit of the student; Switch investment options. A Plan Guardian is not permitted: Nominate an alternative student. Change nominated beneficiaries. Assign/transfer ownership of the investment to another person. Close the investment except in limited circumstances following the death of the student or cessation of the student s education. What are the fees/costs for the fund? Fees associated with the underlying investment options can change, please refer to the fund s current PDS and any relevant SPDS for up to date information. Details can also be obtain from (under Lifeplan Products > Lifeplan Education Investment Fund Announcements) or by calling our Adviser Solutions Team on Lifeplan currently absorbs stamp duty. Stamp duty is a state based revenue so the applicable rates do vary. What is an investment transaction cost (ITC)? An ITC recovers the cost of brokerage and certain other costs of investing incurred by the underlying investment options and serves the same purpose as a buy/sell spread. Transparent fee that is clearly noted on investor statements. Where can more information on the fund be found? The Lifeplan Business Development Manager Team and our Adviser Solutions Team are able to help you during business hours. The fund s current PDS and common forms can be downloaded from the Lifeplan website ( and the Lifeplan Adviser Toolkit section of the website contains our strategy documents and calculators. What is regulation and legislation that supports education investment funds? Lifeplan is registered as a Life Company under the Life Insurance Act The operations of Lifeplan are governed by its Constitution, the Corporations Act 2001 and the Life Insurance Act which together set out the conditions under which Lifeplan is required to operate. Lifeplan is regulated by Australian Prudential Regulation Authority (APRA). Lifeplan is subject to an annual audit and financial reporting conducted by an independent audit firm. Income tax laws amended with effect from 1 January 2003 under Schedule 3 of the Taxation Laws Amendment Act (N0. 1) The definition of a scholarship plan is found in subsection 995- (1) of the Income Tax Assessment Act Many of the taxation provision that apply to investment bonds apply to education investment funds: ITAA36 Income Tax Assessment Act 1936 ITAA97 Income Tax Assessment Act 1997 ITR Income Tax Rates Act 1986

6 6 Transaction Tax Effect Reference Education Investment Funds/Scholarship Plans Accruing or ongoing investment growth in the education benefit fund Education benefit fund deductions Benefit recipients of education benefits paid Investment Bonds Accruing or on-going investment growth in the bond fund (of the life insurer) Additional bond contributions Realised capital gains Receipt of bond proceeds after eligible period Receipt of bond proceeds during eligible period Part-withdrawals from a bond during eligible period Rebate on assessable component of bond proceeds Switching between investment options of a bond Education fund investor: No assessable income. Education fund: Income derived at friendly society fund level on such a fund is specifically non-assessable. Deductions are provided to a friendly society for the income component of education benefits paid. The income component of education benefits paid from an education fund is assessable at the benefit recipient level (ie student not the plan investor). Bond investor: No assessable income. Bond fund: Assessable on realised income and profits. Tax provided on unrealised income and profits. Capital gains treated as revenue profits. Current bond fund income tax rate (before applying tax offsets) = 30%. If they do not exceed 125% of aggregate bond contributions in immediate preceding year: Bond start date for eligible period is unaffected. If they do exceed 125% of aggregate bond contributions in immediate preceding year: Bond start date for eligible period is notionally shifted to the start of the bond year in which the excess contribution is made. Capital gain is disregarded: If bond owner is the original owner. If bond owner is the subsequent owner (by assignment) and acquired the bond for nil consideration. Treated as a capital receipt, and is excluded from assessable income. Included in assessable income, except where tax-free proceeds are received as a result of certain defined events: Death, disability or illness of the life insured. Unforseen serious financial difficulties of the bond owner. Assessable component limited by formula, which reflects the proportion of growth to date. Currently attracts a non-refundable tax offset of 30%, but can offset tax on other assessable income. Unused bond tax offset cannot be carried forward to future years. Normally does not give rise to a taxing event for the bond owner, and does not affect the bond s eligible period start date. Section (1)(d) [ITAA97] Section [ITAA97] Section [ITAA97} Bond owner has no entitlement to bond growth until withdrawal. Normally, sections 6-5 and 10-5 [ITAA97]. Deductions under section 8-1 and other relevant provisions [ITAA97]. Section 23A [ITR]. Subsection 26AH(13) Section [ITAA97] Section 26AH Section 26AH Subsection 26AH(7) Taxation Ruling IT 2346 (especially paragraph 11) Section 160AAB Subsection 4-10(3) and Division 65 [ITAA97] Taxation Determination TD 94/82

7 7 Transaction Tax Effect Reference Direct investment directions by bond owner (other than investment option switching selections) Not permitted by tax rules. If allowed under particular bond rules, bond would not be taxed as a life insurance policy and on-going income may be assessable in bond owner s hands. Taxation Determination TD 92/166 Bond financing costs Interest and other funding costs disallowed. Section 67AAA [ITTA36] For more information about the benefits of Lifeplan Education Investment Fund, please speak to your Lifeplan Business Development Manager on or visit General Enquiries 111 Gawler Place Adelaide SA 5000 Telephone Facsimile advisers@lifeplan.com.au Website Adviser Website Lifeplan Australian Friendly Society Limited ABN AFSL is the issuer of Lifeplan Education Investment Fund. Lifeplan does not give tax or legal advice. The information included in this document is based on Lifeplan s interpretation of the relevant tax laws as at the date of writing and sourced from the Australian Taxation Office website. These laws are subject to change. The application of tax law depends on investor s individual circumstances. Investors should seek their own taxation advice. Any calculations included in this document are produced using basic assumptions, and actual returns and investment conditions will impact on the projected result. This document is for Adviser Use only and is not intended for distribution to investors. The information contained in this document is general information only and does not take into account the specific investment objectives, financial situation or needs of any particular investor. Nothing in this document should be taken as personal advice. Before acquiring or deciding to hold this product, investors should obtain the Product Disclosure Statement (PDS) available from the issuer Lifeplan, and consider whether the product is appropriate for them. LPFM