20/07/2015 – We have recently received a number of enquiries from Aussie expats in Asia that offshore advisers have be ramping up the sales pitch on the viability of investing in Insurance Bonds, otherwise known as Investment-Linked Assurance Schemes (ILAS), and their suitability for non-resident Australians. Offshore advisers have treated Australian expatriates as low hanging fruit for many years when it comes to potential clients and unfortunately we see the aftermath of poor advice usually when its too late so I thought I’d write this post to address a number of the points they’re raising and to set the record straight.
First of all there hasn’t been any new tax law changes that I’ve seen referred to on a number of emails, websites and flyers. In the May 2009 Federal Budget the proposed Foreign Accumulation Fund (FAF) changes were announced with the Foreign Investment Fund (FIF) to be repealed however this process was drawn out and after two drafts the legislation came into force in in 2011. These new rules were designed to allow foreign fund managers to market their products to Australian resident investors not (as has been shown to me in a number of emails written by offshore advisers to Aussie expats) justify the investment rationale of investing in a ILAS.
Now lets look at the product itself, the Investment-Linked Assurance Scheme. These are products which date back over 25 years and haven’t been seen or allowed to be sold in developed markets under the structure that they are being sold to expats in Asia for many years. We have also now seen regulators starting to take action in Hong Kong. As of the first of January 2015 the Hong Kong regulator has banned upfront commissions on these products and the new rules mirror what has been brought in by the market regulators in Europe and Australia with respect to moving away from a commission environment to fee based compensation. So what has been the net affect of the change in legislation I hear you ask? As reported by the South China Morning Post on the 2nd of June 2015 there has been a 42% fall in the sale of ILAS products in Hong Kong compared to the same time last year and this percentage is forecast to dramatically increase. If these products were so good surely they would still be recommended regardless of the changes to the law regarding commissions? Obviously not.
So how have insurance bonds worked in Australia in the past? Well quite simply if you had a taxable income that put you over the 30% marginal tax rate then you could have invested in these bonds, which paid tax at the corporate tax rate of 30% and as long as you held them for 10 years or greater than you would be financially better off than if you invested in your own name at a higher tax bracket. The issue that raises alarm bells with us is that in the Australian example the bond would pay tax to the authorities, whereas the offshore bonds would never have paid them a cent, yet they are claiming the same benefits and its this payment to the tax authorities which underpins the treatment of the bond. Under the previous Foreign Income Fund (FIF) regime there was a section which stipulated that they must pay an ongoing liability for gains made but that stipulation isn’t in the Foreign Accumulation Fund (FAF) legislation. However in today’s age where the government is cracking down on any and every loophole they can find (read my post on their crackdown on HELP/HECS debt held by Aussie expats) it would not surprise me if this is on their radar. Last month the Chartered Accountants of Australia reignited the debate by calling for a further round of consultation to discuss the FAF rules.
So the question you have to ask is do I want to invest in a product that may have uncertainty with respect to the way its treated by the Australian tax authorities but is also being targeted by the overseas regulators? You don’t have to take my word for it but its pretty hard to argue when we see the regulators cracking down on it. At the present time can you invest under the legislation to try and reap tax benefits? Yes. However when you sign up to one of these investments don’t forget you are committing to the product for many years. What’s to say the Australian government doesn’t change their mind in the next 2-3 years and you have signed up for 10 years. That makes your so-called tax free investment quite an expensive investment option. And I haven’t even gone into the fees and charges that are levied on you in these investments which can range from 4-6% annually and that does not include the up fronts but this is a topic for another post.
At the end of the day any sort of saving for the future is good however there are better ways and worse ways of going about it. Speak to an adviser who does not work on commission basis and has a vested interest in not only signing you up as a client but also working beside you over the coming years to provide the financial guidance that you need. There are a lot of good advisers out there who service expats, sometimes you just need to dig a little deeper to sort the good from the bad.