Need a tax advantaged vehicle other than super? An investment bond could be an option.

Superannuation is the most tax effective way to save for retirement.  However, new superannuation rules limit the amount of money Australians can contribute to superannuation, and the amount you can keep in the tax free superannuation pension environment once your preservation age has been reached.

So, if you have reached those limits, what other tax advantaged vehicles can you use?

One option could be an investment bond.

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.

Most modern investment bonds offer a broad range of investment options such as cash, fixed interest, shares, and property, or a range of diversified investment options. The value of each investor’s bond rises or falls with the performance of the underlying investments.

An investment bond is known as a ‘tax paid’ investment

Earnings on the underlying investments are received by the insurance company or friendly society and taxed at the corporate tax rate (currently 30%) before being reinvested in the bond. This means that insurance bonds can be a tax effective investment for investors with a marginal tax rate higher than 30% (or $37,000 taxable income each year).

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

If you make a withdrawal within 10 years from inception, how much of the withdrawal is assessable for tax will depend on which year you make the withdrawal.  See Table 1 for more information.

Table 1: Taxation treatment of withdrawals from an investment bond

Year of withdrawal 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 2/3 of earnings on the investment are included in your assessable income and a 30% tax offset applies*.
Withdrawals in the 10th year 1/3 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 30% tax offset compensates for the tax already paid on earnings by the insurance company or friendly society

How the 125% rule works

Investors should make additional contributions to their investment bond each year to optimise their benefits. Importantly, as long as the contribution does not exceed 125% of the previous year’s contribution, it will be considered part of the initial investment. This means each additional contribution not exceeding the 125% limit can receive the full tax benefits even though it hasn’t been invested for the full 10 years.

If additional contributions exceed the 125% limit at any time, the start date of the 10-year period will reset.

Benefits of an investment bond

  • Tax effective if your marginal tax rate is higher than 30%
  • All returns from the investment while invested, and upon withdrawal after the ten year tax period, do not need to be included in your personal income tax returns
  • Not impacted by the ever-changing superannuation rules
  • Helps to provide certainty for your estate planning because you can nominate a beneficiary to directly receive the money if you were to die (that is, it would by-pass your estate)
  • Wide range of investment choices within the bond
  • You can switch between the available investment options without any personal capital gains tax consequences

Disclaimer: Disclaimer: This article is not legal advice and should not be relied on as such. Any advice in this document is general advice only and does not take into account the objectives, financial situation or needs of any particular person. You should obtain financial advice relevant to your circumstances before making investment decisions. Where a particular financial product is mentioned you should consider the Product Disclosure Statement before making any decisions in relation to the product. Whilst every care has been taken in the preparation of this information, Australian Unity Personal Financial Services Ltd does not guarantee the accuracy or completeness of the information. Australian Unity Personal Financial Services Ltd does not guarantee any particular outcome or future performance. Australian Unity Personal Financial Services Ltd is a registered tax (financial) adviser. Any views expressed are those of the author and do not represent the views of Australian Unity Personal Financial Services Ltd. If you intend to rely on any tax advice in this document you should seek advice from a tax professional. Australian Unity Personal Financial Services Ltd ABN 26 098 725 145, AFSL & Australian Credit Licence No. 234459, 114 Albert Road, South Melbourne, VIC 3205. This document produced in September 2017. © Copyright 2017