What are Investment Bonds and the tax advantages?
Popular in the days before compulsory superannuation, investment bonds fell out of favour as super became the preferred tax-advantaged environment. With tighter restrictions on superannuation contribution limits, bonds might be worth a fresh look.
Tax effective investment bonds can be used to build wealth, without increasing an investor’s personal tax liability. It is offered as flexible investments that can be used for wealth creation, funding an education, estate planning or as an alternative to complement superannuation.
The primary attraction of investment bonds is that earnings are taxed in the hands of the issuing company at a rate of 30%. Invest bonds are designed to be held for at least ten years, upon which withdrawals are tax free. If you access your money before ten years there could be tax implications.
Investment bonds don’t lock up your money for the long term as super does. You can access your money whenever you like, though you do need to be aware of some rules.
What Investment Bonds are used for?
Insurance bonds can be useful estate planning tools. As a form of life insurance, if the owner dies the proceeds will be paid directly to nominated beneficiaries. The money doesn’t go through the estate and can be paid out quickly. In addition, the proceeds are not taxable in the hands of the beneficiaries, even if the bond is less than 10 years old.
They can also be used for purposes such as investing for a child’s education or saving for other large goals.
Timing
Due to their long-term nature, it isn’t just your current marginal tax rate that is important; it’s what your rate will be in the future. As many retirees pay little or no tax, particular consideration needs to be given to purchasing a bond that will be held until after retirement.
Suitability
Investment bonds aren’t for everyone, but they may suit investors who:
- have reached their concessional cap for super contributions;
- High income earners;
- do not wish to lock away their money in super;
- are saving for a long-term goal and have a marginal tax rate above 30%;
- Want to set up investments for children or grandchildren;
- have specific estate planning needs.
There is much more about investment bonds than we can cover here. It’s always a great idea to seek advice and information before investing in anything.
Seek ClockTower’s guidance before deciding if an investment bond is right for you. Give us a call. We are happy to help.
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