One of the reasons superannuation is so popular is the associated tax benefits, but last year the government imposed new limits how much money you can get in to super.
Investment bonds are another tax effective investment strategy that’s been around for years and is becoming popular again as an investment vehicle for tax payers on the highest marginal rate, or indeed anyone paying more than 30% tax. Investment bonds are flexible and easy to establish and manage, but you do need to be aware of a couple of ‘quirks’.
For a start, the opening amount you put into the bond can be whatever you like; unlike superannuation where you are limited in how much you can put in. What you actually invest in will be determined by the provider of the bond, but the range is pretty broad and includes things like managed funds, fixed income, property and cash.
After your initial contribution you don’t have to put any more into the bond if you don’t want to, but you can choose to increase your investment by a maximum of 125% of whatever you put in the year before. So each year the amount invested can grow. Chart 1 shows how much you could invest if you start off with $10,000.
Chart 1: you can start an investment bond with as much or little as you like and and add 125% of your previous year’s contribution every year
Over the life of the bond all the earnings are reinvested, again, much like your super fund. That way you get to benefit from the magic of compounding.
For the life of the bond, which is a maximum of 10 years, the earnings from the investments are taxed inside the bond at 30%, though that rate can be reduced by franking credits. In other words, you don’t have to pay anything out of your pocket while the bond is going, provided (and here’s one of the tricky bits), you let the bond run its full term.
If you do let it go the full 10 years, at the end, you receive all the earnings from the bond and won’t have to pay any further tax on them, plus of course you get back what you invested. That means you’ll have paid 30% tax on the earnings instead of 45%. Importantly, the 10 years starts from the time you make the initial investment, not any subsequent investments. So if you follow the schedule in the table above, the $74,506 invested in year 10 is only tied up for 12 months.
If, for some reason, you have no choice but to break the bond inside the 10 years, you’re allowed to do so, but you’ll have to pay some tax; the amount depends on when you break it.
If you stop within the first eight years, you receive all the earnings but you’ll have to pay the difference between the 30% tax that’s been paid inside the bond while it was in force and your marginal tax rate. In other words, there’s no real tax benefit.
If you stop during year nine, one-third of the earnings are tax-free but you’ll pay your marginal rate on the rest. If you stop during year 10, two-thirds are tax-free.
There are other attractive aspects to investment bonds, like you can nominate beneficiaries of the bond without having to make it part of your will. Also, every investment bond has a built in life insurance policy, and the death benefits can go to any nominee tax-free – regardless of how long the bond’s been going for. Finally, unlike superannuation, the rules around investment bonds have been stable since 1995.
There is one downside to bear in mind: because investment bonds are effectively taxed like a company CGT is paid in full when the bond is redeemed, regardless of how long it’s been held. That compares to the 50% CGT discount when you hold an asset in your own name and sell it after 12 months, or in super, where you pay 10% CGT after 12 months.
Investment bonds are making a comeback as a useful tax planning tool for high income earners and can be a great way to save for a specific objective, like a house deposit, education costs or a boost for grandkids.
It’s a question that comes up from time to time, however, it’s one which superfund members should understand as it’s an important consideration for tax purposes when your estate planning strategy is put in place.
So, what does happen with my super when I die? Well, it really depends upon several factors including:
Age
whether you are in pension or accumulation phase
who is considered a ‘dependent’ under both superannuation (SIS) definition and the ATO definition
the amount you have in super
the ‘taxable’ and ‘non-taxable’ components of your super
what your trust deed allows.
Generally, the options on how your benefit can be paid to beneficiaries upon death are:
Who is a ‘dependent’ and a ‘non-dependent’?
One thing you need to be aware of is that there are two definitions of who is deemed as a dependent. One relates to the SIS Act (Superannuation) and the other under the ITAA 97 (ATO). This is an important distinction because while a dependent receives the benefit tax free, a non-dependent under the ITAA will incur tax on super benefits.
Under the ITAA, a death benefit paid to a beneficiary will be deemed a ‘dependent’ and therefore will be tax free if it is paid to the deceased’s:
spouse;
child under the age of 18;
any person over 18 years and financially dependent or in an interdependent relationship.
An interdependent relationshipis a close personal relationship between two people who live together, where one or both provides for the financial and domestic support, and care of the other. This definition can include parent-child relationships that don’t fall within the usual definition of dependent and can also include sibling relationships.
Any person who does not fit within these categories can only receive the superannuation benefit via the deceased fund member’s estate.
Super Taxation
Superannuation benefits consist of different components for tax purposes:
a tax-free component;
a taxable component; and possibly
an untaxed element of the taxable component.
We have established that if you are a dependent under the ITAA definition, your lump sum benefit will be tax free. However, if you are receiving the super benefit as a pension rather than a lump sum, you may be required to add the taxable component of your pension income to your assessable income. This will depend on your age.
However, if you are a non-dependent for tax purposes, the above components will be taxed as follows:
The new transfer balance cap (TBC) and death benefits
From 1st July 2017, the transfer balance cap (TBC) will apply to limit how much a member can have in retirement phase over their lifetime. For 2017/2018 the TBC is $1.6m. When a member dies, their TBC is not transferable to a dependent or even their spouse.
When the deceased member’s superannuation benefits are cashed as a lump sum, there is no impact on anyone’s TBC and the relevant death benefit taxes we previously discussed will apply.
However, if the benefit is used to continue paying a reversionary pension to a spouse, the surviving spouse will need to add its value to his/her super asset balance. This can only be paid as a death benefit pension if it doesn’t cause the dependent to exceed their TBC. Any excess will need to be paid out as a lump sum death benefit and cannot be retained within the super environment.
To reduce any excess and retain it in the superannuation environment, the receiving beneficiary will need to commute their own benefit first as it can still be held in the superannuation environment as an ‘accumulation’ interest. The death benefit pension they receive from the deceased can be retained up to the $1.6m TBC and it is only any surplus that will need to be paid out as a lump sum.
When did you last review your SMSF trust deed?
Many trustees of superfunds don’t realise that when super legislation changes the trust may require updating. This is particularly critical when dealing with payments of death benefits.
While most trust deeds are written to provide the trustee with wide discretion, to be 100% certain, we strongly recommend they be reviewed. An updated deed will provide complete flexibility when it comes to dealing with excess transfer balance caps, the rollover of death benefits, reversionary and child pensions and effective binding death nominations.
Summary
Superannuation continues to be the most attractive vehicle to grow your wealth. It can also be a very tax effective estate planning tool. For a spouse and financial dependent, a lump sum benefit death benefit is tax free. For non-dependents (as defined by the ATO), there may be taxes of up to 30% on a lump sum super death benefit. Having said this, there are strategies you may be able to implement to significantly reduce, or even eliminate, this tax for non-dependents such as your adult children.
You must also be very careful when a reversionary beneficiary is dealing with a deceased’s pension when it will exceed their transfer balance cap.
If you would like to have a chat about it, we are more than happy to have a look at this for you.
How many of us are thinking ‘will our kids ever be able to afford a home?’ Or, ‘Am I ever going to be able to afford the home that I want or need?’ It’s interesting how the great Australian dream is increasingly being viewed as just that… a dream.
In reality, it doesn’t need to be. Sure it requires some discipline, and possibly a reality check that to gain something, you need to make some sacrifices. It’s not just about saving for a home, but also to build up an asset base to cover other costs like school fees, to live a satisfying lifestyle with the family and to enjoy a comfortable retirement.
A simple savings plan can be long and laborious. How about we accelerate this so as to build that home deposit, or build that asset base much quicker? There are ways we can all do this without lots of risk, or effort.
Everyone’s circumstances are different so our founding partners will work with you one-on-one to help find the best strategies for you and your family.
These days most parents worry about whether their kids spend too much time on screens. In this 60 Minutes (US) interview with former Google product manager, Tristan Harris, he reveals tech companies are deliberately aiming to capture your attention and not let it go.
It may come as no surprise that by using neuroscience to tap into the brain’s most basic drivers tech companies keep you staring at the screen for longer so they make more money. And it’s not just kids that are susceptible to these tricks, which are called “brain hacking”.
It’s a relatively brief interview and (being 60 Minutes) focuses on the more dramatic aspects rather than building a solid case based on research and facts, nor does it offer any solutions. Nevertheless it is thought provoking. (You can watch the video of it here.)
What is “brain hacking”?
Tech insiders on why you should care
Silicon Valley is engineering your phone, apps and social media to get you hooked, says a former Google product manager. Anderson Cooper reports
The following script is from “Brain Hacking,” which aired on April 9, 2017. Anderson Cooper is the correspondent. Guy Campanile, producer.
Have you ever wondered if all those people you see staring intently at their smartphones — nearly everywhere, and at all times — are addicted to them? According to a former Google product manager you are about to hear from, Silicon Valley is engineering your phone, apps and social media to get you hooked. He is one of the few tech insiders to publicly acknowledge that the companies responsible for programming your phones are working hard to get you and your family to feel the need to check in constantly. Some programmers call it “brain hacking” and the tech world would probably prefer you didn’t hear about it. But Tristan Harris openly questions the long-term consequences of it all and we think it’s worth putting down your phone to listen.
Tristan Harris, a former Google product manager
Tristan Harris: This thing is a slot machine.
Anderson Cooper: How is that a slot machine?
Tristan Harris: Well every time I check my phone, I’m playing the slot machine to see, “What did I get?” This is one way to hijack people’s minds and create a habit, to form a habit. What you do is you make it so when someone pulls a lever, sometimes they get a reward, an exciting reward. And it turns out that this design technique can be embedded inside of all these products.
The rewards Harris is talking about are a big part of what makes smartphones so appealing. The chance of getting likes on Facebook and Instagram. Cute emojis in text messages. And new followers on Twitter.
Tristan Harris: There’s a whole playbook of techniques that get used to get you using the product for as long as possible.
Anderson Cooper: What kind of techniques are used?
“…every time I check my phone, I’m playing the slot machine to see, ‘What did I get?’ This is one way to hijack people’s minds and create a habit, to form a habit.” Tristan Harris
Tristan Harris: So Snapchat’s the most popular messaging service for teenagers. And they invented this feature called “streaks,” which shows the number of days in a row that you’ve sent a message back and forth with someone. So now you could say, “Well, what’s the big deal here?” Well, the problem is that kids feel like, “Well, now I don’t want to lose my streak.” But it turns out that kids actually when they go on vacation are so stressed about their streak that they actually give their password to, like, five other kids to keep their streaks going on their behalf. And so you could ask when these features are being designed, are they designed to most help people live their life? Or are they being designed because they’re best at hooking people into using the product?
Anderson Cooper: Is Silicon Valley programming apps or are they programming people?
Tristan Harris: Inadvertently, whether they want to or not, they are shaping the thoughts and feelings and actions of people. They are programming people. There’s always this narrative that technology’s neutral. And it’s up to us to choose how we use it. This is just not true.
Anderson Cooper: Technology’s not neutral?
Tristan Harris: It’s not neutral. They want you to use it in particular ways and for long periods of time. Because that’s how they make their money.
It’s rare for a tech insider to be so blunt, but Tristan Harris believes someone needs to be. A few years ago he was living the Silicon Valley dream. He dropped out of a master’s program at Stanford University to start a software company. Four years later Google bought him out and hired him as a product manager. It was while working there he started to feel overwhelmed.
Tristan Harris: Honestly, I was just bombarded in email and calendar invitations and just the overload of what it’s like to work at a place like Google. And I was asking, “When is all of this adding up to, like, an actual benefit to my life?” And I ended up making this presentation. It was kind of a manifesto. And it basically said, you know, “Look, never before in history have a handful of people at a handful of technology companies shaped how a billion people think and feel every day with the choices they make about these screens.”
“Inadvertently, whether they want to or not, they are shaping the thoughts and feelings and actions of people. They are programming people.” Tristan Harris
His 144-page presentation argued that the constant distractions of apps and emails are “weakening our relationships to each other,” and “destroying our kids ability to focus.” It was widely read inside Google, and caught the eye of one of the founders Larry Page. But Harris told us it didn’t lead to any changes and after three years he quit.
Tristan Harris: And it’s not because anyone is evil or has bad intentions. It’s because the game is getting attention at all costs. And the problem is it becomes this race to the bottom of the brainstem, where if I go lower on the brainstem to get you, you know, using my product, I win. But it doesn’t end up in the world we want to live in. We don’t end up feeling good about how we’re using all this stuff.
Anderson Cooper: You call this a “race to the bottom of the brain stem.” It’s a race to the most primitive emotions we have? Fear, anxiety, loneliness, all these things?
Tristan Harris: Absolutely. And that’s again because in the race for attention I have to do whatever works.
Tristan Harris: It absolutely wants one thing, which is your attention.
Now he travels the country trying to convince programmers and anyone else who will listen that the business model of tech companies needs to change. He wants products designed to make the best use of our time not just grab our attention.
Anderson Cooper: Do you think parents understand the complexities of what their kids are dealing with, when they’re dealing with their phone, dealing with apps and social media?
Tristan Harris: No. And I think this is really important. Because there’s a narrative that, “Oh, I guess they’re just doing this like we used to gossip on the phone, but what this misses is that your telephone in the 1970s didn’t have a thousand engineers on the other side of the telephone who were redesigning it to work with other telephones and then updating the way your telephone worked every day to be more and more persuasive. That was not true in the 1970s.
Anderson Cooper: How many Silicon Valley insiders are there speaking out like you are?
Tristan Harris: Not that many.
We reached out to the biggest tech firms but none would speak on the record and some didn’t even return our phone call. Most tech companies say their priority is improving user experience, something they call “engagement.” But they remain secretive about what they do to keep people glued to their screens. So we went to Venice, California, where the body builders on the beach are being muscled out by small companies that specialize in what Ramsay Brown calls “brain hacking.”
Anderson Cooper speaks with Ramsay Brown, the cofounder of Dopamine Labs
Ramsay Brown: A computer programmer who now understands how the brain works knows how to write code that will get the brain to do certain things.
Ramsay Brown studied neuroscience before co-founding Dopamine Labs, a start-up crammed into a garage. The company is named after the dopamine molecule in our brains that aids in the creation of desire and pleasure. Brown and his colleagues write computer code for apps used by fitness companies and financial firms. The programs are designed to provoke a neurological response.
“A computer programmer who now understands how the brain works knows how to write code that will get the brain to do certain things.” Ramsay Brown
Anderson Cooper: You’re trying to figure out how to get people coming back to use the screen?
Ramsay Brown: When should I make you feel a little extra awesome to get you to come back into the app longer?
Ramsay Brown
The computer code he creates finds the best moment to give you one of those rewards, which have no actual value, but Brown says trigger your brain to make you want more. For example, on Instagram, he told us sometimes those likes come in a sudden rush.
Ramsay Brown: They’re holding some of them back for you to let you know later in a big burst. Like, hey, here’s the 30 likes we didn’t mention from a little while ago. Why that moment–
Anderson Cooper: So all of a sudden you get a big burst of likes?
Ramsay Brown: Yeah, but why that moment? There’s some algorithm somewhere that predicted, hey, for this user right now who is experimental subject 79B3 in experiment 231, we think we can see an improvement in his behavior if you give it to him in this burst instead of that burst.
When Brown says “experiments,” he’s talking generally about the millions of computer calculations being used every moment by his company and others use to constantly tweak your online experience and make you come back for more.
Ramsay Brown: You’re part of a controlled set of experiments that are happening in real time across you and millions of other people.
Anderson Cooper: We’re guinea pigs?
Ramsay Brown: You’re guinea pigs. You are guinea pigs in the box pushing the button and sometimes getting the likes. And they’re doing this to keep you in there.
The longer we look at our screens, the more data companies collect about us, and the more ads we see. Ad spending on social media has doubled in just two years to more than $31 billion.
Ramsay Brown: You don’t pay for Facebook. Advertisers pay for Facebook. You get to use it for free because your eyeballs are what’s being sold there.
Anderson Cooper: That’s an interesting way to look at it, that you’re not the customer for Facebook.
“You don’t pay for Facebook. Advertisers pay for Facebook. You get to use it for free because your eyeballs are what’s being sold there.” Ramsay Brown
Ramsay Brown: You’re not the customer. You don’t sign a check to Facebook. But Coca-Cola does.
Brown says there’s a reason texts and Facebook use a continuous scroll, because it’s a proven way to keep you searching longer.
Ramsay Brown: You spend half your time on Facebook just scrolling to find one good piece worth looking at. It’s happening because they are engineered to become addictive.
Anderson Cooper: You’re almost saying it like there’s an addiction code.
Ramsay Brown: Yeah, that is the case. That since we’ve figured out, to some extent, how these pieces of the brain that handle addiction are working, people have figured out how to juice them further and how to bake that information into apps.
Larry Rosen: Dinner table could be a technology-free zone.
While Brown is tapping into the power of dopamine, psychologist Larry Rosen and his team at California State University Dominguez Hills are researching the effect technology has on our anxiety levels.
Larry Rosen: We’re looking at the impact of technology through the brain.
Rosen told us when you put your phone down – your brain signals your adrenal gland to produce a burst of a hormone called, cortisol, which has an evolutionary purpose. Cortisol triggers a fight-or-flight response to danger.
Anderson Cooper: How does cortisol relate to a mobile device, a phone?
Larry Rosen: What we find is the typical person checks their phone every 15 minutes or less and half of the time they check their phone there is no alert, no notification. It’s coming from inside their head telling them, “Gee, I haven’t checked in Facebook in a while. I haven’t checked on this Twitter feed for a while. I wonder if somebody commented on my Instagram post.” That then generates cortisol and it starts to make you anxious. And eventually your goal is to get rid of that anxiety so you check in.
So the same hormone that made primitive man anxious and hyperaware of his surroundings to keep him from being eaten by lions is today compelling Rosen’s students and all of us to continually peek at our phones to relieve our anxiety.
Larry Rosen: When you put the phone down you don’t shut off your brain, you just put the phone down.
Anderson Cooper: Can I be honest with you right now? I haven’t paid attention to what you’re saying because I just realized my phone is right down by my right foot and I haven’t checked it in, like 10 minutes.
Larry Rosen: And it makes you anxious.
Anderson Cooper: I’m a little anxious.
A computer tracks minute changes in Anderson Cooper’s heart rate and perspiration
Larry Rosen: Yes.
We found out just how anxious in this experiment conducted by Rosen’s research colleague Nancy Cheever.
Nancy Cheever: So the first thing I’m going to do is apply these electrodes to your fingers.
While I watched a video, a computer tracked minute changes in my heart rate and perspiration. What I didn’t know was that Cheever was sending text messages to my phone which was just out of reach. Every time my text notification went off, the blue line spiked – indicating anxiety caused in part by the release of cortisol.
Nancy Cheever: Oh, that one is…that’s a huge spike right there. And if you can imagine what that’s doing to your body. Every time you get a text message you probably can’t even feel it right? Because it’s such a um, it’s a small amount of arousal.
Anderson Cooper: That’s fascinating.
Their research suggests our phones are keeping us in a continual state of anxiety in which the only antidote – is the phone.
Anderson Cooper: Is it known what the impact of all this technology use is?
Larry Rosen: Absolutely not.
Anderson Cooper: It’s too soon.
Larry Rosen: We’re all part of this big experiment.
Anderson Cooper: What is this doing to a young mind or a teenager?
Larry Rosen: Well there’s some projects going on where they’re actually scanning teenager’s brains over a 20-year period and looking to see what kind of changes they’re finding.
Gabe Zichermann
Gabe Zichermann: Here’s the reality. Corporations and creators of content have, since the beginning of time, wanted to make their content as engaging as possible.
Gabe Zichermann has worked with dozens of companies – including Apple and CBS – to make their online products more irresistible. He’s best known in Silicon Valley for his expertise in something called “gamification,” using techniques from video games to insert fun and competition into almost everything on your smartphone.
Gabe Zichermann: So one of the interesting things about gamification and other engaging technologies, is at the same time as we can argue that the neuroscience is being used to create dependent behavior those same techniques are being used to get people to work out, you know, using their Fitbit. So all of these technologies, all the techniques for engagement can be used for good, or can be used for bad.
“Asking technology companies, asking content creators to be less good at what they do feels like a ridiculous ask.” Gabe Zichermann
Zichermann is now working on software called ‘Onward’ designed to break user’s bad habits. It will track a person’s activity and can recommend they do something else when they’re spending too much time online.
Gabe Zichermann: I think creators have to be liberated to make their content as good as possible.
Anderson Cooper: The idea that a tech company is not going to try to make their product as persuasive, as engaging as possible, you’re just saying that’s not gonna happen?
Gabe Zichermann: Asking technology companies, asking content creators to be less good at what they do feels like a ridiculous ask. It feels impossible. And also it’s very anti-capitalistic, this isn’t the system that we live in.
Ramsay Brown and his garage start-up Dopamine Labs made a habit-breaking app as well. It’s called “Space” and it creates a 12-second delay — what Brown calls a “moment of Zen” before any social media app launches. In January, he tried to convince Apple to sell it in their App Store.
Ramsay Brown: And they rejected it from the App Store because they told us any app that would encourage people to use other apps or their iPhone less was unacceptable for distribution in the App Store.
Anderson Cooper: They actually said that to you?
Ramsay Brown: They said that to us. They did not want us to give out this thing that was gonna make people less stuck on their phones.
