Investment Bond: James’ nerdy twin brother

Want to cap tax on your investments and completely avoid Capital Gains Tax?  An  Investment bond may be for you!

 

What is an investment bond? Is it the nerdy brother of James Bond?

Yes, sort of… no.

An investment bond is a specially taxed investment that pays tax at the company tax rate of 30%.

Investment bonds are offered by certain Australian companies such as life insurance companies and friendly societies.

The best part is if you hold the bond for more than 10 years (and meet the investment rules), you won’t pay any capital gains tax when you sell the bond.

 

Who is an insurance bond right for?

If you and your partner earn more than $87,000, you are paying 39% tax on income and capital gains due to your marginal tax rate (or 47% if earning over $180,000). Unfortunately, we can’t do anything about your wage income being taxed at that rate, but there are ways to ensure your investment income is not subject to that same high rate of tax. Utilising an investment bond would cap this tax at 30%.

Investment bonds are also fantastic for those who want to retire before they can access super, or for those maxing out their super contributions ($25,000 if claiming a tax deduction).

They are also brilliant for people who have estate planning issues, like blended families.   Investment bonds allow you to nominate a beneficiary to be paid directly (without passing through the estate). This ensures there is no ability for other people to lay claim!

They can also be great for investors who have property-heavy portfolios who need additional diversification. Investment bonds are available across a range of asset classes, including Australian and International shares, fixed interest and even alternative investments. It is important to note however that because investment bonds have a timeframe of 10+ years, investing in growth assets typically provides a better outcome.

 

Who is an insurance bond wrong for?

Low income earners who don’t pay much tax,

Those who don’t have high savings capacities or the ability to contribute consistently

Impatient investors who don’t have a 10+ year time frame to invest

 

What’s the catch?

The ten year rule

If you hold an investment bond for at least 10 years the returns on the entire investment, including additional contributions made, will have no further tax payable (you must also meet the 125% rule below).

That means no capital gains tax, nor income tax payable to the investor. Yippee!

If you don’t hold the bond for ten years, it’s not disastrous… you just don’t get the full tax benefit. You get credited for the tax you have paid (at 30%) and then may have to pay additional tax to “top up” to your marginal tax rate.

Tax treatment of investment bond withdrawals

Year withdrawal made Tax treatment
Withdrawals within 8 years 100% of the earnings on the investment bond are included in your assessable income and a 30% tax offset applies*.
Withdrawals in the 9th year Two-thirds of earnings on the investment are included in your assessable income and a 30% tax offset applies.
Withdrawals in the 10th year One-third of earnings on the investment are included in your assessable income and a 30% tax offset applies.
Withdrawals after the 10th year All earnings on the investment are tax free and do not need to be included in your assessable income.

 

The 125% rule

Investors are encouraged to make additional contributions each year up to the value of 125% of last years’ contributions. If you stay under the limit, it is deemed as part of the initial investment and keeps ticking along to the golden tenth year.

If you exceed the 125% rule, the start date of the bond resets and you must wait another 10 years for the full tax benefits to be realised. This means if you don’t make any contributions in one year, you can’t make any more contributions. In this case, if you want to keep this strategy alive, you can simply start another bond…

 

Ownership and fees

Ownership is important when setting up an investment bond. The bond needs an owner, a life insured and a beneficiary. Putting the right people into these roles is important to ensure the funds are controlled and then passed on correctly. Additionally, if you pull out the funds early, there can be top up tax implications, so ownership is important.

Fees are also important to consider when doing any sort of investment. You can invest in a well-diversified aggressive portfolio at a price of about 1% of total running costs. This makes investment bonds comparable to traditional investments such as super and managed funds.

 

What investment options are available?

That really depends on the product provider. The investment menu is more limited than the open market, however it is improving. Most investors can be catered for using both indexed and active managed funds that provide good diversification, or even a really concentrated exposure (dependent on the goals of the investor).

 

Are they right for ME though?

Investment bonds are brilliant for the right people, but inappropriate if used incorrectly.

They are a bit more complicated than other investment types, and typically better for high, consistent income earners, that may or may not need additional asset protection, have a 10+ year investment view, want professional management and ultimately tax efficiency.

So, to be honest, its best to consult your finance professional. If you can’t find one, give us a call…

 

We’d love to hear from you!  To book a free consultation, please book online or contact us on info@fortressfs.com.au 

Written by Chris Black, Director at Fortress Financial Solutions

 

Fortress Financial Solutions founder Chris Black is an award-winning financial planner based in Toowoomba who specialises in superannuation, investing, business succession, cash flow management, retirement planning and personal insurances (including life insurance, income protection, total permanent disability and trauma insurance).
Corporate Authorised Representative of Magnitude Group Pty Ltd ABN 54 086 266 202, AFSL 221557.

Information on this site may be regarded as general advice. That is, your personal objectives, needs or financial situations were not taken into account when preparing this information. Accordingly, you should consider the appropriateness of any general advice we have given you, having regard to your own objectives, financial situation and needs before acting on it. Where the information relates to a particular financial product, you should obtain and consider the relevant product disclosure statement before making any decision to purchase that financial product.

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