There has been an increase in demand for investment bonds in Australia as clients are seeking tax-effective strategies besides superannuation and corporate structures.
An investment bond (or insurance bond) is an efficient long-term savings vehicle which operates similarly to a managed fund, where investors can choose from a range of investment options to suit their risk appetite and objectives, but with the security and tax benefits of a life insurance policy.
Investment bonds are potentially suitable for:
- Investors with a marginal tax rate higher than 30%,
- People looking for certainty in estate planning and distributing wealth – avoiding any potential challenges to their Will,
- Investors with long term investment horizons (10+ years),
- Parents/grandparents who wish to invest on behalf of their children/grandchildren through the use of a child advancement policy,
- Investors aged 65-74 who do not currently meet the work test for superannuation,
- People who have reached annual contribution limits in superannuation.
Income from the investment is taxed within the bond at the corporate rate of 30% by the issuer, which means that investment earnings – if the investor has held the bond for 10 years or more – are not required to be included in the investor’s assessable income tax return. There is no additional personal or capital gains tax applicable.
Unlike superannuation where strict conditions of release must be satisfied, such as reaching preservation age, investment bond holders have access to their investment at all times. If an investor does withdraw prior to the 10 year period, they will need to declare the earnings in their tax return as follows:
- Within 8 Years – All earnings are taxed at marginal tax rate with a tax offset of 30%
- During 9th Year – 2/3 of the earnings taxed at the marginal tax rate with a tax offset of 30%
- During 10th Year – 1/3 of the earnings taxed at the marginal tax rate with a tax offset of 30%
- After 10th Year – All earnings are tax free
There is no upper contribution limit at the commencement of the bond. Each year investors can make additional contributions of up to 125% of the previous year’s contributions, with the benefit that these additions are treated as if they were invested at the time of original investment. If the 125% limit is exceeded the start of the 10 year period is re-set.
Investing on Behalf of a Child
Investment bonds allow investments on behalf of a child or grandchild to either create education savings or have the ownership automatically transferred to the child on reaching their nominated vesting age. The automatic vesting to the child has no personal taxation or CGT consequences and can be used to target funding for education, car purchase and house deposits.
For estate planning purposes, the bond holder can nominate one or more beneficiaries and the benefit is paid directly to the nominee as a tax-free investment rather than to the estate. This is not subject to the terms of an investor’s will or probate.
Advice for Your Circumstances
Similarly to all investments, investment bonds carry potential risk that the underlying investment manager may not achieve their investment objectives and may have poor performance.
For some clients investment bonds will offer an appealing long-term, tax-effective investment option that is simple to establish and administer, to supplement their other savings and investment strategies. If you’d like to learn more, please give us a call on (02) 9908 9888 to discuss your particular financial situation.
Kate is an Authorised Representative of Hillross Financial Services Limited (AR Number 1007833).