What is 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%.

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 that withdrawal is assessable for tax will depend on which year you make the withdrawal. See Table 1 for more information.

How the 125% rule works

Investors should make additional contributions to their investment bond each year to optimise the 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% (i.e. $37,000 taxable income each year)
  • 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 bypass 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

This information has been produced by Australian Unity Personal Financial Services Ltd (‘AUPFS’) ABN 26 098 725 145, AFSL & Australian Credit Licence 234459. 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. It does not represent legal, tax, or personal advice and should not be relied on as such. You should obtain financial advice relevant to your circumstances before making investment decisions. AUPFS is a registered tax (financial) adviser and any reference to tax advice contained in this document is incidental to the general financial advice it may contain. You should seek specialist advice from a tax professional to confirm the impact of this advice on your overall tax position. Nothing in this document represents an offer or solicitation in relation to securities or investments in any jurisdiction. Where a particular financial product is mentioned, you should consider the Product Disclosure Statement before making any decisions in relation to the product and we make no guarantees regarding future performance or in relation to any particular outcome. Whilst every care has been taken in the preparation of this information, it may not remain current after the date of publication and AUPFS and its related bodies corporate make no representation as to its accuracy or completeness. March 2019.