Bond, investment bond

August 2018

An investment bond is an investment vehicle offered by insurance companies and friendly societies (our financial advisers can provide advice in establishing one).

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They’re actually insurance policies—with beneficiaries nominated in the event the owner dies—but they share many similarities with typical managed funds: investments are made in a range of asset classes, such as shares, fixed interest, or property.

One of the main attractions of investment bonds are concessional tax rates, which apply both on the earnings generated within the bond, and on the capital gain when the bond is accessed or ‘sold’.

Investments held within these types of bonds can be accessed ‘tax-free’ after a period of 10 years, and have concessional tax arrangements if accessed after eight.

Earnings and capital gains in the bond are taxed at a maximum of 30% (less any franking credits or other deductions), compared to investments held outside of super which are taxed at the individual’s marginal tax rate.

Consider that in the 2017-18 financial year, personal income tax rates (including Medicare) of 32.5% applies for every dollar earned above $37,000, 37% for every dollar earned above $87,000, and 45% for every dollar earned above $180,000 (plus the 2% Medicare levy).

Once an investment bond is established, investors can make contributions of up to 125% above the previous year’s contribution (i.e. if a bond is established with $100,000, a contribution of $125,000 can be made in year two, $156,250 in year three, etc.).

The 10-year ‘tax-free’ period starts again if contributions exceed the ‘125% rule’ so it’s important to consider contribution tax implications.

From a tax perspective, investment bond income and capital gains are taxed at a capped rate that may be lower than that which would apply to income from assets held personally by individuals with a higher marginal income tax rate (i.e. an individual with a taxable income above $37,000 per year and paying a 32.5% marginal income tax rate plus the Medicare levy).

Of course, individuals can invest in super—where investment earnings in the accumulation phase are instead taxed at no more than 15% compared to the investment bond tax rate of 30%—however, rules limit when super can be accessed, typically at age 65 and/or after age 60 and retirement.

Typical examples of these types of investors include those wanting to save for a long-term goal, such as children’s education or savings plans, or for other financial goals.

Investment bonds may also suit people who exceed $1.6 million in super, where generally in this case no more personal contributions can be made into super.

Investment bonds can be complex, so consider speaking with a qualified financial adviser to ensure these products suit your individual goals and objectives. Contact UniSuper Advice to find out more.