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The Experts

Are managed funds the best way to invest outside of super?

Michael Blake
Thursday, June 13, 2019

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Managed funds provide access to a range of diversified investments but with managed funds you pay tax on any earnings at your marginal tax rate, which might be as high as 47% as opposed to investment bonds, where fund earnings are taxed at 30%. Investment bonds like superannuation are designed as long-term, tax-paid investments but have the added advantage of being able to access your funds at any time.

For example, if your annual taxable income is at least $37,001, your marginal tax rate is 34.5% or higher on any additional income. So, at this taxable income, you can expect to pay this tax rate or higher on other investments held in your name, such as managed funds, but also on shares or property.

The tax paid on earnings within investment bonds, such as Centuria LifeGoals, is capped at 30%. This amount can also be reduced through the use of franking credits from shares and other allowable deductions. The table below shows the marginal tax rates for the financial year 2019.

Centuria LifeGoals offers other advantages, especially around their simplicity and estate planning. For example, you do not need to include the fund earnings in your personal tax return, unless you withdraw in the first 10 years. You can switch between any of the 22 investment options without incurring capital gains tax and if you keep the investment for 10 years you can withdraw part or all of your investment with no additional tax to pay regardless of capital gains made. If you do withdraw funds in the first 10 years, you receive a 30% tax offset for the tax the fund has already paid.

Below is a summary of the pros and cons of investing via a managed fund.

Managed funds

Pros

·      Access to professionally managed portfolio

·      Ability to diversify

·      Regular savings plan

·      Full access to funds

·      Long-term growth opportunities

Cons

·      High initial investment

·      Fund earnings included in your personal tax return

·      Capital gains tax on transfer

·      Capital gains on switching

·      Included in your estate

·      Accessible by creditors

Centuria LifeGoals shares all the benefits of a traditional managed fund, but they also have additional advantages including:

·      Can invest as little as $500 initially

·      No requirement to include earnings in your personal tax returns

·      No capital gains tax on switching

·      Tax-paid investment at 30%

There are also estate planning benefits to investment bonds that managed funds do not offer.

·      You can nominate beneficiaries and in the event of your death, the funds pass directly to them outside of the will and probate ensuring your wishes are fulfilled.

·      You can nominate a life insured and in the event of their death, the funds are paid to the beneficiaries tax paid, regardless of the start date.

·      Fund ownership can be assigned (transferred) to another owner at any time with no CGT consequences, as long as the transfer is for no consideration.

·      Because the investment is deemed a life insurance policy, it cannot be accessed by creditors in the event of bankruptcy.

When compared with traditional managed funds, investment bond products offer many additional benefits.

Published: Thursday, June 13, 2019


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