Educating the children

A NEW breed of tax-effective education savings plans has been introduced for parents wanting to save for their children’s post-secondary edu-cation.

Both Australian Unity and Australian Scholarships Group have launched products that take advantage of the new ‘tax-paid’ investment regime of the Business Tax System.

To qualify for the full tax benefits, these products impose some restrictions. Nevertheless, for many parents or grandparents, they can provide a superior long-term savings option to traditional managed funds.

In many respects, education savings plans work like a traditional managed fund.

Parents (or grandparents) can make lump sum contributions or commence a regular savings plan. In Australian Unity’s case, the regular savings plan can commence with an initial contribution of $500, while lump sum contributions must start at $2,500.

The money is then invested in diversified balanced funds (ie a mix of shares, bonds, property and cash) through professional investment managers.

ASG offers just one investment option, managed by US group State Street, while Australian Unity offers three options to suit the time frame and risk profile of different investors. Australian Unity employs a range of investment managers.

The key distinguishing feature of the ASG and Australian Unity products is their tax treatment.

They are a form of tax-paid investment bond which, in turn, are modern versions of the old friendly society bonds and insurance bonds.

Tax is paid by the fund at just 30 per cent, well below the 48.5 per cent marginal tax rate facing many parents.

During the accumulation period, neither the parent nor the nominated beneficiary would be subject to any personal tax.

During the payout period, the income is tax-free in the hands of the student. Moreover, the student may obtain a refundable tax credit if their marginal tax rate is below 30 per cent. The credits effectively recover tax previously paid by the fund.

To qualify for these tax benefits, certain conditions apply. In particular, the payout can only be made when the student is undertaking an approved

post-secondary course.

Beyond this similarity, there are wide differences between the ASG and Australian Unity products.

For instance, Australian Unity allows the benefit to be spread over 10 years, up to the age of 28, while ASG specifies that the benefit must be paid over three years.

Australian Unity also offers more flexible access to contributions. It allows partial or full withdrawals – of both capital and earnings – at any time after a plan has been running for 12 months.

In contrast, ASG offers only partial withdrawals prior to maturity.

At the child’s 18th birthday, Australian Unity allows the parent (or grandparent) to decide whether they withdraw their entire capital contribution.

If they choose to withdraw, the capital return is treated as a tax-exempt capital sum. In this case, the earnings component would be used to finance the education benefits.

In contrast, ASG automatically refunds the capital contributions irrespective of the child’s study plans.


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