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Debunking the myths around tax-paid 'investment bonds'

April 27, 2018

April 27, 2018

An investment bond is a managed investment, usually operated by an insurance company or friendly society, where your money is pooled with money from other investors and invested in the investment options each investor chooses.

An investment bond is a ‘tax paid’ investment.  Earnings on the underlying investments are received by the insurance company or friendly society and taxed, on your behalf, at the corporate tax rate (currently 30%) before being reinvested in the bond.

If the bond is held for at least 10 years the returns on the investment will be tax free in the investor’s hands.

Investment bonds have evolved

Investment bonds have been available for decades, but they have evolved over that time to suit the needs of modern investors.

The problem is many people still remember the old-style investment bonds and think they haven’t changed.

So, in this article, we debunk the four main myths around investment bonds.

Myth 1: Investment bonds are only suitable for high income earners

Investment bonds are suitable for high income earners.  But they are also suitable for many low to medium income earners as well. 

For example, many individuals, companies or trusts looking to reduce their taxable income, investment bonds provide a favourable tax environment – i.e. tax is capped at the corporate rate – in which to invest. Lower taxable income also means a lower Medicare Levy.

For those wanting to attain or increase Government support benefits, an investment bond structure may help. Eligibility for many of our peripheral Government benefits is assessed on taxable income, so quarantining additional investment income within an investment bond structure may help to retain the Family Tax Benefit, Child Care Rebate, Seniors Health Care Card or even the Health Insurance rebate.

For young investors under the age of 18, who are subject to minor’s penalty tax rates as high as 66% once their investment income exceeds $416 in a single financial year, investment bonds may be suitable. These young investors are not necessarily high income earners, but usually a case of low income earners being subjected to a high tax rate who could benefit from using an investment bond.

Myth 2: Investment bonds are only suitable for 10+ year time frames

Investment bonds offer a concessionally taxed environment within which to invest. When the investment bond is held to its 10th anniversary, any subsequent withdrawals are treated as non-taxable in the hands of the investor.  So, yes, holding the bond for 10+ years can be advantageous.

However, it’s also important to note that withdrawals made prior to the 10th anniversary are concessionally taxed in the hands of the investor, with a 30% tax credit against the assessable portion.

Myth 3: Investment bonds are always taxed at 30%

This is partly correct – the investment bond must remit tax on earnings to the Australian Taxation Office at the capped rate of 30%. This is indeed true in the case of a cash or fixed interest portfolio.

However, if we consider more diversified portfolios, particularly those investing in Australian shares, the imputation credits received by the investment bond in the form of dividend payments can currently be utilised towards the tax liability of the fund.

As a result, an investment bond invested in an underlying portfolio of fully franked Australian shares may have an effective tax rate that is considerably lower than the capped corporate rate of 30%.

Myth 4: Investment Bonds have a lack of investment choice

Contemporary investment bonds now offer fully diversified fund menus to suit all modern investors.

Here are some scenarios where you might consider using an investment bond to improve your financial position:

  • You need to invest outside of superannuation because you aren’t allowed to invest in superannuation e.g. you have already reached your contribution or balance limits, or you don’t qualify due to age
  • You expect to retire at an early age, and you will therefore be under the age where you can access your superannuation, and therefore you will need access to money in other vehicles
  • You want to have some money invested outside the superannuation system because its rules keep changing
  • You have a family trust and want to reduce taxable distributions to members
  • You want to maximise or retain eligibility for health insurance rebate or the Family Tax Benefit
  • You want to maximise tax offsets, SAPTO, LITO, or Seniors Health Card
  • You want a portion of your estate to be passed directly to a family member on your death, rather than be part of your estate (which may be subject to a lengthy and costly challenge)
Michelle Roberts

Advisor

  • Bachelor of Business (Property Investment)
  • Advanced Diploma of Financial Services (Financial Planning)
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Michelle Roberts is an Authorised Representative of Australian Unity Personal Financial Services Limited (AUFP) ABN 26 098 725 145, AFSL 234459. This information has been prepared by AUPFS. The taxation position described is a general statement and should only be used as a guide. It does not constitute tax advice and is based on current laws and their interpretation.

This information has been prepared without taking into account the investment objectives, financial situation or particular needs of any particular person. Because of this you should, before acting on it, consider its appropriateness, having regard to your objectives, financial situation and needs. Past performance is not an indication of future performance.