Investment bonds, which are sometimes also called insurance bonds, offer some pretty unique tax, asset protection, and estate planning benefits.
 
One might look at an investment bond as being a little bit like superannuation. It is a structure that holds assets, and has its own set of rules associated with its use.Earnings are taxed within the fund so they don’t form a part of your personal tax return.
 
One of the key rules to be aware of is the125% rule on contributions ; which is, you can’t contribute more than 1.25 times (125%) of what you contributed the year before. The year is based on the anniversary date of the policy, not calendar or financial year.
By way of an example, if in the first year you contributed $10,000, then in the second year you can contribute anywhere up to $12,500.
It does have a downside in that if in any year one does not make a contribution to their investment bond, then no further contributions may be made since 125% of $0 is $0.
 
Unlike superannuation, there are no conditions of release in order to access the money in your investment bond. You can access any amount at any time. However, there will be tax implications if you withdraw the money within the first 10 years from the inception of the bond.
 
Given an investment bond has a maximum tax rate of 30%, it can be attractive to higher marginal rate tax payers. Then, there are tax concessions on the withdrawal from an investment bond after eight years, and after ten years, it becomes totally tax-free.
A further bonus is that if the investor were to pass away, the investment bond will be paid out to the beneficiary tax-free even if the 10-year window has not been met.
 
This opens up a whole new world of strategies where someone with a short life expectancy might invest in an insurance bond, and if they were to pass away prior to the 10-years, the investment bond can still be distributed tax-free.
 
Investment bonds are a common structure used to invest for children, whether that be savings for the child’s education or simply to gift them some assets at an appropriate age.

Contact Paul on 0417 567 747 to discuss as Flakus and Associates has trusted associates who can provide you with further details on this.

 

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