There are many Australian expatriates who live and work abroad. As with most expatriates, when they leave Australia and become non-resident for tax purposes they open up a world of new investment opportunities, which can present significant benefits.

However, like many expatriates they are likely to return home one day and therefore it is essential to have a flexible financial plan that takes this into account. In recent years, there have been some significant changes to the tax laws in Australia that have a big impact on how expatriates can plan their finances.

A Bit of History...
Until 2010, Australian tax residents with offshore investments were generally required to declare, and pay tax, on these investments on an annual basis. This was covered by the Foreign Investment Fund (FIF) rules. However, in 2010 these rules were repealed and replaced with the Foreign Accumulation Fund (FAF) rules.

The FAF rules dramatically changed the scope of which offshore investments were subject to taxation when an Australian returned home. One of the most important changes introduced is that foreign life insurance policies are now treated the same as domestic life insurance. This means that they are not reportable or taxed on an annual basis.

This opens the door to a powerful financial planning tool for Australian expatriates. Foreign life insurance investments generally have a wider investment choice than their domestic counterparts. This greater choice offers the chance for better growth and better financial planning.

Why Use Life Insurance as an Investment Vehicle?
Outside of the traditional form of life insurance, whereby a policyholder pays a premium to be covered for a large amount of money in the event of their death, there are also various investment platforms offered by life insurance companies.

It is very common to use life insurance as an investment platform because it provides some useful financial planning benefits.

Capital Accumulation – Gross Roll Up

International life insurance products are generally not subject to tax while the investments accumulate in value. This means your savings can grow free of tax, with the exception of certain withholding taxes.

Switching Funds

As your investments grow, you may wish to switch funds to realise gains and invest in new opportunities. Buying and selling funds directly can create a liability to taxation on gains, but by using life assurance products, you should be able to avoid this and make decisions driven by investment performance rather than tax considerations.

International life insurance also offers investors the following advantages:

•    The potential for tax-free withdrawals later in life (more on this below)
•    Benefits can be paid to spouses and next of kin free from taxation
•    A wide investment choice which can include almost any tradable asset in the
world
•    Multiple currency options

“From year 11 onwards any withdrawals taken from the life insurance investment are not subject to any taxation.”

Tax-free Withdrawals from Life Insurance Policies
A day will come when you will want to withdraw money from your investments to supplement your income, during your retirement for instance.

For the first 8 years of a life insurance investment, Australian tax residents can be subject to taxation on withdrawals they make at their marginal rate:

•  AUD  0 – 18,200  = 0%
•  AUD  18,201 – 37,000 = 19%
•  AUD  37,001 – 80,000  = 32.5%
•  AUD  80,001 – 180,000 = 37%
•   AUD 180,001+  = 47%

At this point there is no real benefit to having a life insurance investment over any other kind of investment. However, from year 9 onwards the story becomes more interesting.

In year 9, only two-thirds of the gains are taxable at your marginal rate. In year 10, only one-third of the gain is taxable. Finally, from year 11 onwards any withdrawals taken from the life insurance investment are not subject to any taxation.

There are, of course, careful rules that you must comply with in order to receive this benefit and we suggest you always seek professional help from a financial advisor. You should be aware that it is not possible to add significantly large sums to an existing investment and still avoid a possible tax charge after ten years. Rules exist that are designed to restart the ten-year period from the start of the policy year in which the new investment is made.

Nevertheless, for anyone who has long-term financial planning goals, which we all should have, this is a very powerful way of creating a tax-free income later in life.

How to Calculate the Taxation of Life Insurance
In accordance with Section 26AH (6) ITAA 1936, the owner of an international life insurance policy will be assessed for income tax on chargeable bonuses.

To calculate the amount of bonus assessable for income tax the following formula is used:
Relevant amount (bonus) = (A/B) * [(B+C) – (D+E)]

A = the amount withdrawn from the policy
B = surrender value immediately prior to the withdrawal sum of any
C = earlier amounts paid out
D = total gross premiums before charges paid to the date of withdrawal
E = sum of any previous relevant amounts
(chargeable profits)

An Example…
Initial Investment = AUD 100,000

Surrender Value at time of withdrawal = AUD 150,000

AUD 25,000 Withdrawal in Year 8

Relevant amount = AUD (25,000/150,000)*[(150,000 + 0) – (100,000 + 0)] = 8,333

AUD 25,000 Withdrawal in Year 9

Of the AUD 8,333 calculated above only two-thirds is assessable = AUD 5,555

AUD 25,000 Withdrawal in Year 10

Of the AUD 8,333 calculated above only one-third is assessable = AUD 2,777

Year 11 onwards

Any amount received as bonus will not be assessable for income tax.

As you can see from this simple example, the use of life insurance based investments can offer Australian’s some significant long-term tax benefits. It is therefore, a very worthwhile tool to consider for your financial planning needs such as retirement.

Please note that beijingkids does not necessarily endorse the views presented in this article.

About William Frisby
William originally arrived in Beijing as a finance guy on a bicycle and will probably leave as a finance guy on a bicycle. He works for Premium Finance Group (PFG), a financial consultancy that has been established in China for over ten years. PFG offers clients no-nonsense, personalized advice and serves the whole of China from their Beijing and Shanghai offices. Services include international property, investment, insurance and financial planning. To contact William, email william.frisby@premiumfinance-group.com.

Photo: Simon Cunningham (flickr)

Recently I have been asked by a lot of families in Beijing about Life Insurance. Maybe my article two months ago on Will’s & Trusts got people thinking, or more likely it’s the pollution and crazy Beijing roads.

Regardless of what it is in life which makes people inquire about life insurance, there should be only one key driver….’if I were to die tomorrow what would happen to my family and loved ones.’

Currently I am in the process of helping a client with his life insurance. Things in his life are great, he has just had a little boy and like any new father he is very happy. However, the birth of his son has brought back some painful memories. When he was around ten years old, his father fell ill and tragically died. My client was extremely fortunate that his father had put in place a life insurance policy that allowed him to continue his life as his father would have wanted. It is therefore of no surprise that when he found he was going to be a father his attention quickly turned to protecting his new family. My client is not really in a position where he has that much spare cash to spend on life insurance, particularly with all the costs a newborn can bring. Nevertheless, he wanted to put in place as much protection as he could afford.

I deal with many clients that do and do not have life insurance. For the ones that do not it is the first thing I talk about every time I see them. I believe it’s your duty to have something in place if you have children.

No one wants, or likes, to talk about death and this is understandable. However, that should not make planning for it any less important. One thing we know for sure is that death is inevitable, so we have to think about it at some point. So how much insurance do you need?

Some people I meet have great insurance benefits as part of their job. Others have substantial personal wealth so that they can self-insure through their savings. Unfortunately, the vast majority of people I meet are under insured. Alarmingly, a lot of people I meet do not have any insurance because they think they can’t afford it. Let’s make one thing clear now; insurance is always affordable when you consider the risk to your family not having it. Insurance that you put in place could be what allows your family to keep their home or your children to attend college.

I often hear the phrase ‘life insurance is the worst investment you’ll ever make’. People say this because the only way to get a return from it is if you die. While I understand the sentiment of this statement I do not agree with it. Life insurance is the one best investments you can make with your money. What we must understand about life insurance is that it increases the power of our money. Paying USD 1 for insurance might mean my family will receive USD 1,000 if I die. That’s a 1,000 percent return on my investment, pretty good if you ask me.

Available options?

Term Insurance
This is very simple, what you do is nominate an amount of money you would like your loved one to receive if you die. How much? At the very least I advise everyone to have insurance that will pay off major debts such as a mortgage. If you are the primary wage earner, I also recommend an amount of money that is capable of generating 75 percent of your income.

Whole of Life or Universal Life
As the name suggests this type insurance covers you for the whole of your life. A key feature of this insurance is that it has a cash value that you can redeem at anytime. A lot of the people I speak to like this because they can cash the policy in and receive an investment back which can make the insurance very cheap or even free.

Critical Illness
This type of insurance pays a cash amount on the diagnosis of a terminal illness such as cancer. I find it is often overlooked by people as something they do not need. However, the fact is you are 75 percent more likely to die of a terminal illness than natural causes.

As a point to close on, I would like to repeat that anyone who has financial dependents has a duty to have some form of protection in place for their loved ones! How much differs for everyone, but trivial matter such as time and cost should never stop you planning.

Please note that beijingkids does not necessarily endorse the views presented in this article.

About William Frisby
William originally arrived in Beijing as a finance guy on a bicycle and will probably leave as a finance guy on a bicycle. He works for Premium Finance Group (PFG), a financial consultancy that has been established in China for over ten years. PFG offers clients no-nonsense, personalized advice and serves the whole of China from their Beijing and Shanghai offices. Services include international property, investment, insurance and financial planning. To contact William, email william.frisby@premiumfinance-group.com.

Photos: aag_photos (flickr)

Recently I have been asked by a lot of families in Beijing about life insurance. Maybe my article two months ago on wills and trusts got people thinking, or more likely it’s the pollution and crazy Beijing roads.

Regardless of what it is in life which makes people inquire about life insurance, there should be only one key driver….’if I were to die tomorrow what would happen to my family and loved ones.’

Currently I am in the process of helping a client with his life insurance. Things in his life are great, he has just had a little boy and like any new father he is very happy. However, the birth of his son has brought back some painful memories. When he was around ten years old, his father fell ill and tragically died. My client was extremely fortunate that his father had put in place a life insurance policy that allowed him to continue his life as his father would have wanted. It is therefore of no surprise that when he found he was going to be a father his attention quickly turned to protecting his new family. My client is not really in a position where he has that much spare cash to spend on life insurance, particularly with all the costs a newborn can bring. Nevertheless, he wanted to put in place as much protection as he could afford.

I deal with many clients that do and do not have life insurance. For the ones that do not it is the first thing I talk about every time I see them. I believe it’s your duty to have something in place if you have children.

No one wants, or likes, to talk about death and this is understandable. However, that should not make planning for it any less important. One thing we know for sure is that death is inevitable, so we have to think about it at some point.

So how much insurance do you need? Some people I meet have great insurance benefits as part of their job. Others have substantial personal wealth so that they can self-insure through their savings. Unfortunately, the vast majority of people I meet are underinsured. Alarmingly, a lot of people I meet do not have any insurance because they think they can’t afford it. Let’s make one thing clear now; insurance is always affordable when you consider the risk to your family not having it. Insurance that you put in place now could be what allows your family to keep their home or your children to attend college.

I often hear the phrase ‘life insurance is the worst investment you’ll ever make’. People say this because the only way to get a return from it is if you die. While I understand the sentiment of this statement, I do not agree with it. Life insurance is the one best investments you can make with your money. What we must understand about life insurance is that it increases the power of our money. Paying USD 1 for insurance might mean my family will receive USD 1,000 if I die. That’s a 1,000 percent return on my investment; pretty good if you ask me.

What are my options?

Term Insurance – This is very simple, what you do is nominate an amount of money you would like your loved one to receive if you die. How much? At the very least I advise everyone to have insurance that will pay off major debts such as a mortgage. If you are the primary wage earner, I also recommend an amount of money that is capable of generating 75 percent of your income.

Whole of Life or Universal Life – As the name suggests this type insurance covers you for the whole of your life. A key feature of this insurance is that it has a cash value that you can redeem at anytime. You can take a look at quotes for life insurance over 80 and find many exciting life insurance plans. A lot of the people I speak to like this because they can cash the policy in and receive an investment back which can make the insurance very cheap or even free.

Critical Illness – This type of insurance pays a cash amount on the diagnosis of a terminal illness such as cancer. I find it is often overlooked by people as something they do not need. However, the fact is you are 75 percent more likely to die of a terminal illness than natural causes

As a point to close on, I would like to repeat that anyone who has financial dependents has a duty to have some form of protection in place for their loved ones! How much differs for everyone, but trivial matters such as time and cost should never stop you planning.

About William Frisby
William originally arrived in Beijing as a finance guy on a bicycle and will probably leave as a finance guy on a bicycle. He works for Premium Finance Group (PFG), a financial consultancy that has been established in China for over ten years. PFG offers clients no-nonsense, personalized advice and serves the whole of China from their Beijing and Shanghai offices. Services include international property, investment, insurance and financial planning. To contact William, email william.frisby@premiumfinance-group.com.

Photos: stockMonkeys.com (flickr)