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Investment bonds easing financial stress for tax-savvy consumers

There may be some caveats, but investment bonds can serve as a tax efficient investment vehicle. This is especially so when planning for life events like schooling, inheritances or property purchases.
Investing 101

Investment bonds have an interesting tax twist that should tweak the interest of financial advisers who typically have client bases including middle and high-income earners.

These bonds come with a 125 per cent Contribution Rule that allows the income component of any withdrawals from the investment fund to be tax-free after 10 years. Although this tax-free status comes with certain caveats, investors holding the bond for 10 consecutive years should be able to escape the clutches of the taxman.

When an investment bond is established, the first year’s contribution is uncapped. The sky’s the limit. But it’s important to think carefully about this contribution because future annual contributions are capped at 125 per cent of this initial investment, meaning the initial investment sets the benchmark.  

  • So, what are the caveats? If the investment exceeds 125 per cent of the previous year’s contributions, the start date of the 10-year tax rule is reset for tax purposes. Similarly, missing a year’s contribution also resets the start date if you contribute again subsequently. Money can be withdrawn at any time but if done inside 10 years, any earnings will be taxed.

    It’s this tax incentive that makes investment bonds such as an efficient way to save for a life event; think schooling, an inheritance or buying a house. As Michael McQueen (pictured), CIO of Foresters Financial, a member-owned financial services company providing investment bond solutions, explains, “they can ease much of the financial stress of meeting private school fees in the secondary years when the tax-free income kicks in. If the money is needed before then, it can be redeemed, although any accumulated tax will be payable at the applicable marginal rate”.

    Investment bonds, which can be taken out singularly or jointly, including by children aged 10 to 16 (with parental or guardian permission), companies or trusts, are not just a tax play.

    They enhance estate planning by offering the following features: sitting outside an estate they can’t be contested; are binding by default so can’t lapse; don’t require probate to mature and vest; and are not subject to any inheritance taxes. 

    These bonds also help protect wealth by allowing people to invest an inheritance, compensation, redundancy payout or a windfall gain. And, unlike superannuation, there is no limit on the initial investment.

    They also offer flexibility. Ownership can be assigned or transferred at any time with no tax impact. It’s the same with beneficiaries, as well as there being no restrictions on non-dependents. They also have the capacity to potentially shield assets from creditors and enhance benefits or entitlements from Services Australia.

    On the investment front, they offer access to an institutional grade, diversified investment portfolio that sits outside superannuation. Foresters offer four investment options – sustainable, balanced, growth and high growth – that can provide an investment strategy to complement superannuation.  

    “In this respect investment bonds are no different to superannuation as there are no restrictions on asset classes, domestic or international,” McQueen says. “Property, equities, credit, alternatives, fixed interest, and cash; all can be found in an investment bond portfolio. It’s not just asset diversity. Using multiple fund managers is a hallmark of investment bonds, thus minimising key person risk, as well as having a sharp focus on management fees.”

    Staff Writer


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