Tax-paid investment bonds: A clever tool to consider

Posted on: April 23, 2015
Posted by: Daniel Budreika

The value of Financial AdviseOne investment strategy often overlooked by people is a tax-paid investment bond (also known as an insurance bond).

An investment bond is a seldom used product that is designed to be held for the long term, although funds can be accessed from it at any time.  These types of accounts often have various different managed investment options available to choose from, depending on the provider and your appetite for risk and return.

The earnings from the bond are retained in the fund and reinvested but the attraction is that they are taxed at a maximum of 30%.  Think about this for a moment.  If your taxable income is over $37,001 you begin to pay 34.5% tax (including the Medicare levy) on every additional dollar earned until you get to $80,000.  Between $80,001 and $180,000 the marginal tax rate is 39%.  Over $180,000 the tax rate is 47%.  For example, if you earn $80,000 from work and then an additional $10,000 per year from another investment, those additional earnings will be taxed in the next marginal tax bracket of 39%.  On the other hand, if those additional earnings were generated within a tax-paid investment bond, the tax is paid internally within the account at the company rate of 30%.  This means this additional income does not form part of your personal tax return, saving you 9%.  Individuals on the top marginal tax rate save 17%.  Any franking credits earned within the bond can be used to offset this tax even further.  In the example above, the tax saving is $900 per year but this will increase if the investment earnings are greater and compounded over a long term period as the money is reinvested.

If funds are withdrawn, the investment earnings attract at 30% tax offset.  Funds withdrawn after 10 years are generally not tax assessable entirely.

So when would someone look to use a tax-paid investment bond?  The uses vary far beyond just those on high incomes.

  • Unlike superannuation, investment bonds don’t have the same level of complexity attached to them. There are no work tests, which is great for people aged between 65 and 74 or those who have never worked and are not eligible to contribute.
  • They can be a great idea for individuals who have reached their annual concessional and non-concessional contribution limits in super.
  • Estate planning is easy and flexible as death benefits do not form part of the will. Benefits can be paid to beneficiaries tax-free (unlike super in some cases) as a lump sum or income stream outside of the estate.
  • The value of the investment can be used as security to borrow against at very low rates. This allows you to keep your money invested in a tax-effective environment.
  • They are a great saving tool for children’s education.
  • Those who want to accumulate wealth outside of super.

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