Insurance bonds could work around LITO changes

People affected by a change in the Federal Budget to the low-income tax offset (LITO) that reduces the amount of tax-free income a child can earn from $3333 to just $416 could look at insurance bonds as another option, according to IOOF.

Because those affected will now pay 66 cents in the dollar above $417 and 45 cents per dollar over $1307, they may want to look at putting that money in an insurance bond, which is taxed at 30 cents in the dollar, according to IOOF technical services manager Damian Hearn.

Insurance bonds are appealing because there is no end-of-year tax work as everything is done at the bond level and does not have to be disclosed in a tax return, Hearn said.

Bonds are also making a comeback for other reasons, such as the reduced contributions caps, he said.

Advisers may want to think about insurance bonds for clients who have children with savings in play, and whether or not such clients should be directing more money into growth assets such as managed funds, he said.

“A bond is something you shouldn’t necessarily think fits into one part of a client’s life – it can be used from the date of birth all the way through their life up until their date of death as part of their estate planning strategy,” he added.

There can be tax impacts if the money is accessed within 10 years but a minor can still hold up to almost $7,000 in a bank account without incurring the higher threshold, meaning that usually that money within the insurance bond will not need to be accessed, he said.