No one likes extra tax.
Australians share a complex relationship with taxation. Whether it’s negative gearing, global giants ‘not paying their fair share,’ or boomers living in fear of losing their franking credits, tax discord in Australia is constant.
If there were a way to avoid extra tax, especially for wealthier Australians—and one company could capitalise on it—do you think it would be popular?
A Snapshot Of The Generation Development Group Ltd (ASX: GDG) Business Model
Generation Development Group Ltd (ASX: GDG) is a leading Australian company in the financial services industry.
Generation Development Group specialises in investment bonds and life insurance products. GDG operates through its subsidiary Generation Life, offering tax-effective investment solutions, particularly through investment bonds. These bonds are attractive to investors seeking long-term growth, flexibility in contributions, and tax benefits, making them a popular choice for estate planning and wealth accumulation.
Listed on the ASX in December 2007, GDG rebranded from Austock to Generation Life in 2017. At the current share price of $3.44 it has a market capitalisation of about $1b.
The business is divided into two segments: Generation Life, which offers Bonds and Annuity products, and Lonsec, which Generation Life has been in the process of acquiring since October 2020 when it bought 37% for $20.1 million.
Lonsec is a provider of investment research, ratings, and portfolio construction services in Australia. The company specialises in independent analysis of investment products, including managed funds, ETFs, and superannuation options. Lonsec’s research and ratings are used by financial advisors, asset managers, and institutions to make informed investment decisions.
Generation Development Group gradually increased its stake in Lonsec via selective buybacks before announcing plans to acquire the remaining shares in June of 2024.
Generation Development Group acquired the remaining 61.9% of Lonsec for $197.4 million, funded by a Conditional Placement of $49.2m to Lonsec shareholders and an Equity raising of approximately $155.4 million. Lonsec brings a strong market position and a respected brand. The business has a resilient revenue model, with 99% of revenue recurring.
Lonsec has remained a stand-alone business, and to avoid a conflict of interest, it was announced at the time of the deal that Lonsec would no longer rate GDG products.
In the 2024 financial year, Generation Development Group recorded record sales for both Investment Bonds and LifeIncome.
In the September quarter update, Funds Under Management (FUM) reached $3.6 billion, a 33% increase on the previous corresponding period at a 27% compound annual growth rate. The company recorded its highest inflows on record in the September quarter. Investment bond inflows alone surpassed $200 million for the first time. According to their 2024 results presentation, the company ranks as number 2 for total FUM and number 1 for market share inflows for investment bonds as of 31 March 2024.
Generation Development Group was a previous beneficiary of a Pool development fund licence.
Having the license allowed for a number of benefits including:
- Tax-free capital gains
- Dividends tax exempt.
- Tax rate of 15%
It did, however, mean that Generation Development Group could not make an acquisition greater than 30% of its committed capital. This restriction proved too much. Not only were investments restricted, it was unable to purchase pre-owned shares in a company without regulatory approval, could not invest in a company whose total assets exceeded $50 million, and could not borrow money. It was seen as a significant cap on growth, so in June 2024 the licence was revoked. That means that from 1 July 2023 Generation Development Group is taxed as an ordinary company.
Why Superannuation Law Changes Are Good For Generation Development Group
For a number of years now, the Australian government has looked to find ways of taxing previous tax-free segments of the superannuation system.
From 1 July 2017, the government introduced the transfer balance cap which at a very basic level is a limit on the amount of superannuation that can be in ‘retirement phase’. The retirement phase is your tax-free pension compared to your accumulation phase which is when you’re growing your super balance. With this limit in place, anything excess is taxed at 15% regardless of whether you are still working and contributing to your super. The cap itself began at $1.6 million in the 2018 financial year and will reach $1.9 million by 2025 due to indexation.
In the news over the last 12 months is the proposal to take a further taxation step and tax individuals with a total super balance above $3 million.
Sleep insomnia? Have a read of the exposure draft explanatory materials. If not, in short, the policy is proposed to commence on 1 July 2025 for the 2026 financial year onwards. Only those individuals with a total super balance exceeding $3 million are in the firing line.
So wealthy Australians are getting taxed a little more, is this a problem?
I’ll leave out the political commentary, but what has been controversial is the calculation of earnings and subsequent taxation. We’ve seen a lot of talk coming out of the US around a tax on unrealised gains, and we could be seeing something similar closer to home.
Under the proposal, the tax on earnings in an individual’s super would include unrealised gains. A member’s total superannuation balance includes the movements in unreleased asset valuations during the relevant year. This is particularly problematic when it comes to illiquid assets like property.
Any negative earnings can be carried forward to offset future year’s profits, but at this stage there is no mechanism to carry back negative earnings amounts where an unrealised gain was previously realised.
Furthermore, unlike the transfer balance cap, the $3 million threshold won’t be indexed over time.
Whether this goes through or not is far from certain since the federal opposition has stated that the Div 296 tax would be one thing that we would reverse. However, if the $3m cap does become law, it should benefit Generation Development Group’s annuity and insurance bond business.
To wit, CEO Grant Hackett has highlighted that upcoming superannuation changes present a once-in-a-lifetime opportunity for GDG.
In 2021 there were around 55,000 individuals with balances over $3 million, and Treasury estimated there would be around 80,000 individuals with more than $3 million in superannuation by July 2025. The high net worth (HNW) investor segment continues to grow, and according to Generation Development Group only 28% of HNW’s used a financial adviser in 2022-2023. With taxation changes being made, there is a potential driver to seek advice, particularly around inheritance and estate planning.
If you’re going to be taxed at 30%, there are plenty of alternatives to be either taxed the same or less with far more flexibility available compared to the stringent rules of superannuation. Trusts, and investment companies are ways in which individuals can either keep their taxes lower or split their incomes with trusted individuals. However, rules are tightening around the way in which this can be done, and a company strategy can just be kicking the tax can down the road.
What Generation Development Group provides is a further alternative option, and you don’t get too far into its website before it’s thrown in your face!
So what are investment bonds? Per the Generation Life website:
“Investment bonds are tax paid investments, meaning that when earnings are received we pay an effective tax rate of up to 30% of the earnings. If your marginal tax rate is higher than 30%, this makes investment bonds a great tax-effective long term investment.
If you invest in the bond for at least 10 years, your growth on the entire investment, including additional contributions, will be tax paid, and withdrawals after the 10th anniversary will be free of any personal tax in your hands – subject to the rules around the 125% opportunity. Also, you will not attract any capital gains tax on withdrawal or when switching between investment options.”
The 125% opportunity is a key factor to the tax-free incentive.
An investor can make additional investments each year of up to 125% of the previous year’s contributions without resetting the investment’s 10-year advantage period. For example, if you were to contribute $10,000 in year 1, the maximum you could contribute in year 2 without resetting the tax-free status after year 10 is $12,500.
Generation Development Group offers three styles of investment bond:
Each bond has its own quirks based on the tax minimisation theme.
Taking a look at the LifeBuilder bond, outside of the 125% rule, there is no limit on the funds you can contribute to the investment bonds or restrictions on when you can withdraw. If you make a withdrawal within the 10-year period, you will receive a 30% tax offset to reduce your tax payable amount for the same financial year. If you make a withdrawal in years 9 or 10 of your investment, the tax payable by you is reduced by 1/3rd and 2/3rds respectively.
A number of other benefits of an investment bond include:
- Unlike superannuation (in the accumulation phase), funds aren’t restricted, so you can access them at any time.
- The bonds are easily transferable
- Only taxable if funds are withdrawn, making tax reporting simple.
- Income generated within the bond remains in the bond, meaning taxable income can be kept lower.
Outside of bonds, Generation Life has also created LifeIncome, an investment-linked lifetime annuity.
The company sees this as a pivotal product and high conviction play as the opportunity for retirement income markets grows in the future, and the government looks to incentivise these types of products to supplement pension income.
What Is The Great Wealth Transfer?
Depending on where you search, the great wealth transfer (from boomers to millennials) is coming and could be between $3.5 to $4 trillion over the next 10 years.
Baby boomers have seen the greatest era of wealth creation and hold a significant portion of total wealth in Australia. According to some commentators, this is due primarily to the average boomer’s ability to eschew avocado toast and settle for second-hand furniture, all while heroically facing down the spectre of 17% interest rates. Younger minds, on the other hand, tend to question this narrative due to the total lack of evidence for it.
Whatever the reason for the boomers’ success, a 2018 research paper found that $120 billion was transferred in that year alone, with the value of transfers having doubled since 2002.
Source: Wealth transfers and their economic effects – Research paper
With such an emphasis on estate planning, boomers may look to transfer their wealth via investment bonds because these products offer flexibility when it comes to wealth transfer.
You see, there is no personal capital gains tax upon transfer of ownership of an investment bond, and Generation Development Group offers an EstatePlanner product to take advantage of this benefit.
What are the risks facing Generational Development Group (ASX: GDG)
There are a number of risks GDG and its competitors in the industry face.
Given cost of living pressures, those holding bonds may look to draw down on their funds, or those looking to invest in new bonds may have to reduce the amount of their investment. That said, the tax benefits that accrue after 10 years should provide some incentive to stay the course.
Generation Development Group operates in a highly competitive industry, and there are a number of listed and non-listed competitors in the market, including Australian Unity (ASX: AYU), Challenger Limited (ASX: CGF) and AMP Limited (ASX: AMP) to name a few. There’s an ongoing need to innovate and develop products that address customer needs like tax-efficient solutions, estate planning, and retirement income. Advisors are the primary distribution channel for investment bonds and life products. If it loses out to competitors, sales volumes could take a hit.
And of course, while this article is focussed on the benefits arising from proposed regulatory changes, it is possible that a Liberal government could take a different tack and make regulatory changes that disadvantage Generation Development Group. This is a major idiosyncratic risk that is out of the control of the company.
Generation Development Group Shares Valuation
As mentioned, Generation Development Group shares have had an incredible run and have doubled in price over the last 12 months.
For FY 2024, Generation Development Group recorded diluted earnings per share of 3.01 cents per share, putting it on a current trailing 12-month multiple of over 100 times earnings! The trailing dividend yield is less than 0.6%.
Whatever metric you look at, it is certain the market has already factored plenty of future growth into the current share price.
If superannuation changes pass through Parliament, Generation Development Group has the potential to fulfill those expectations and even exceed them. While I personally do not have enough conviction in the future growth to want to take a position at these prices, the potential tailwind (which could persist for years) makes Generation Development Group an ASX growth stock worth keeping on your watchlist.
Disclosure: The author of this article Nick Maxwell does not own shares in GDG. The editor Claude Walker does own shares in GDG. Neither will trade GDG shares for at least 2 days following the publication of this article. This article is not intended to form the basis of an investment decision and is not a recommendation. Any statements that are advice under the law are general advice only. The author has not considered your investment objectives or personal situation. Any advice is authorised by Claude Walker (AR 1297632), Authorised Representative of Equity Story Pty Ltd (ABN 94 127 714 998) (AFSL 343937).
The information contained in this report is not intended as and shall not be understood or construed as personal financial product advice. You should consider whether the advice is suitable for you and your personal circumstances. Before you make any decision about whether to acquire a certain product, you should obtain and read the relevant product disclosure statement. Nothing in this report should be understood as a solicitation or recommendation to buy or sell any financial products. A Rich Life does not warrant or represent that the information, opinions or conclusions contained in this report are accurate, reliable, complete or current. Future results may materially vary from such opinions, forecasts, projections or forward looking statements. You should be aware that any references to past performance does not indicate or guarantee future performance.