An investment bond is a tax-paid managed investment product. You can invest in various assets such as cash, fixed interest, property, shares and diversified investments and have access to your funds at any time.
An Investment Bond is a tax-paid investment as the bond pays tax on the earnings it receives at the corporate tax rate (currently 30%) before reinvesting the net earnings.
Investment Bonds have two rules to maintain their tax effectiveness. The funds need to remain invested for 10 years and any additional contributions cannot be more than 125% of the initial investment or previous year’s investment.
10 Year Rule
If the funds remain invested inside the bond for 10 years, the investor can receive all capital and income tax-free.
When you redeem all or part of the investment within 10 years from its commencement, part or all the earnings will be assessed for tax depending on when the redemption is made. The following table explains this.
Year 0-8, 100% of the earnings are taxed*
Year 9, 2/3 of the earnings are taxed*
Year 10, 1/3 of the earnings are taxed*
After Year 10, all earnings are tax free
*Your assessable income will include the earnings and a 30% tax offset applies.
125% Rule
Following the initial investment, any additional contribution is considered part of the initial investment if it is no more than 125% of the previous year’s contribution. The bond will retain the tax benefits if it meets this condition.
The start date of the 10-year period will reset if any additional contribution exceeds to 125% limit.
Benefits of an Investment Bond
- They are tax effective if your marginal tax rate is higher than 30%, currently anyone earning over $45,000.
- Your annual tax return will not include the annual earnings of the bond as they remain inside the bond.
- They help provide certainty for estate planning as the funds will pass directly to a nominated beneficiary.
- If the bond owner passes away before the 10-year period, the beneficiary receives the proceeds completely tax free.
One potential use of an investment bond is saving for a child’s future education needs. Parents or grandparents can start saving while the child is young. When needed, the bond owner may withdraw the funds tax-free, say for university or private high school.
And this all happens without any additional tax liability for the bond owner.
If you would like to know more, please do not hesitate to get in touch with us.
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