Features of Investment Bonds
Investment bonds offer a number of features that investors should consider and compare with alternative products as summarised below:
Flexible investment options
Investment bonds allow investors to access many asset classes and provide a market-linked investment vehicle to help meet investment goals.
Investment bonds offer a number of benefits and may complement an investment in superannuation. These benefits are summarised below.
An alternative tax effective structure
Like superannuation, tax is paid within the investment bond rather than personally by the investor. The maximum tax paid on the earnings and capital gains within an investment bond is 30% although franking credits and tax deductions can reduce this effective tax rate. This makes them an attractive investment option for high income earners.
A key feature of investment bonds is that if the investment is redeemed after 10 years, no personal tax is paid by the investor. However, if the investment is redeemed within the first 10 years, the investor will pay tax on the assessable portion of growth as shown in the table below.
|Withdrawal Occurs||Taxable Portion (of growth withdraw)|
|Within the first 8 years||100%|
|In year 9||Two-thirds|
|In year 10||One-third|
|After 10 years||Nil|
The investor receives a 30% tax offset to reduce the tax payable on the taxable amount.
No limit on the investment amount
There is no limit on the amount that can be invested to establish an investment bond. Investors can also make subsequent investments up to maximum of 125% of the previous year’s contribution without restarting the ten year period. Investors can choose to start new investment bonds if higher amounts are to be invested.
No excess contribution tax
Investment bonds can provide a tax effective means of investing and avoid excess contributions tax that may otherwise apply in the case of superannuation contributions.
Investment bonds give investors the flexibility to access funds at any time. This can act as a hedge against restricted access to superannuation.
Capital gains tax simplicity
Investment bonds provide simplicity as earnings are automatically reinvested in the bond. This means reinvestment dates do not need to be tracked for capital gains tax purposes. Investors can also switch between investment options without triggering personal capital gains tax.
Transfer of ownership/ named beneficiary
The ownership of the investment bond can be easily assigned or transferred at any time. The original start date is retained for tax purposes. This may not be achievable within a company structure without creating tax liabilities.
Investment bonds may offer protection from creditors in the case of bankruptcy (subject to certain rules), which may not be possible through a company structure.
Estate planning flexibility
Death benefit payments from an investment bond provide flexibility and control.
The death benefits from an investment bond can be directed to a nominated beneficiary or the estate tax free regardless of who receives the benefit or how long the investment has been held. This flexibility may reduce the risk of disputes over estates and enable the benefits to be paid more quickly.
The death benefit from an investment bond is paid tax-free to the beneficiary.
It is easy to set up a Bond and a regular savings plan without worrying about taxation each year.
No tax file number [TFN] reporting obligations
Under current tax and privacy rules, a bond investment does not require a TFN to be quoted. This also means no high tax deductions from withdrawals, where a TFN has not been quoted.
Non-residents treated the same
An investor who is not an Australian tax resident (who can be an Australian living overseas as much as a foreign investor) is treated similarly to a resident, for Australian tax purposes.
Equal entitlement applies to the bond tax offset (unlike an imputation credit from franked dividends).
Also, no non-resident withholding tax deduction is requirement – on a withdrawal by a non-resident bond investor.