Family and Discretionary Trusts with too much distributable income can benefit from Investment Bonds

Potential Div7A issues can be managed – Accountants looking for solutions.

Austock’s Richard Atkinson discusses Private Trusts holding Investment Bonds.

Many ‘private trusts’ run corporate beneficiary structures (sometimes called a ‘bucket company’) to receive income distributions for investment assets that if retained within a family trust or distributed to high-income adults or children, would otherwise attract tax at the top marginal tax rate (MTR).

An issue with making distributions and creating assets in a private company comes down to accessibility when it is required by shareholders. This is usually paid as a dividend, fully taxable at the shareholders’ MTR, or accessed via a loan which would trigger Division 7A considerations. Such loans can have many pitfalls and require careful and expert management.

Not the topic for discussion here, but a perennial quest for accountants is finding effective and simple alternative solutions for private trusts with too much distributable income without engaging in potential Division 7A issues for clients.

A worthwhile option is to consider Investment Bonds to ‘soak up’ otherwise distributable income within a family or discretionary trust. Investment Bonds accumulate ‘capital’ and do not distribute ‘income’. This makes a Bond an ideal investment vehicle for a trust to hold. As no annual income is generated by the Bond, there is nothing to distribute and the need for a ‘bucket company’ is lessened or becomes defunct. The Bond operates a bit like an ‘internal beneficiary’ of the trust and absorbs otherwise distributable income that would be generated by alternative investment assets.

Investment Bonds come with various other advantages. Bonds are internally taxed within each investment portfolio option at effective rates generally between 21% and 30%. They also attract a full 30% tax-offset, if withdrawn (fully or partially) within the first 10 years. Bonds can be transferred ‘in-specie’ to trust beneficiaries without a tax event necessarily taking place and can be very efficient as an estate planning tool. Bond Nominations are binding and bypass the legal estate and proceeds are paid ‘tax-free’ to beneficiaries.

Austock Life’s Richard Atkinson says “At Austock we have many discretionary trusts investing in Bonds for all the reasons stated above. Their trustees recognise the benefits of having an internal beneficiary, simplified compliance reporting, administration and estate planning benefits”.

This article contains factual information and is not intended to constitute financial product advice or imply any recommendation or opinion about Imputation Bonds (IBs). Austock Life Limited AFSL 225408 ABN 68 092 843 902 is the issuer of IBs. In deciding to acquire or to hold an IB you should obtain the relevant Product Disclosure Statement and consider its content. We recommend that before investing you seek professional advice from a licensed financial adviser.