Private Placement Life Insurance

I am continuing to restructure our finances in response to the changes in capital gains tax in Australia. When I made our venture capital investments, I assumed that the maximum capital gains tax rate was 23.5%. I put the investment in Moominmama's name, as at that time her marginal tax rate was lower than mine. Originally, I wanted to put these investments in our SMSF, but they didn't allow that. I still think that is crazy, when farmers can have their farms in their SMSFs. 

So what should we do with these investments under the new tax regime? There is a chance that we will get a big cash realization on one of the companies I invested in in a single year. That would push most of the gain into the 47% tax bracket. We would like to smooth the gain and ideally reduce the tax rate.

As an existing investor and shareholder of Aura Group, I learnt about a product called private placement life insurance or an offshore insurance bond that they have begun to market. You may be familiar with Australian insurance bonds. Little My has one containing the money he inherited from my mother. This is the same idea with three key differences:

1. The Australian bond is taxed at the company level at 30%. These are based in the Isle of Man and are not taxed inside the bond. If you withdraw the money after 10 years, the ATO has ruled that the payout is tax free the same as it is for the Australian bonds. You can receive distributions before 10 years if you pay tax on the profit component.

2. You can contribute existing assets including alternative investments and brokerage accounts into the bond. The downside is that you can no longer transact on these accounts, you have to go via the manager–Aura in this case.

3. At least one of the "insured" has to be a wholesale investor. 

So, this meets both our goals. There is still the question of whether they can take the Angellist investments. Without that there is no point. And I am a bit hesitant to cede control. And of course there will be a lot of fees. We would be including other investments beyond the Angellist ones to get the size up. 

Even if we don't end up doing this, this seems likely to be a great business for Aura.

If we don't do this, an alternative is to set up an Australian investment company that will convert capital gains into franked dividends. This will lower the tax rate from 47% to 32% by smoothing the payout over time.

The irony of Labor's tax changes is that the the young people they claimed to want to help will bear the brunt of the changes, while wealthy investors can exploit various tax shelters to reduce the impact.