Tax-effective options for saving and investing for a child’s education

The rising cost of education means that educating your children is a significant expense.
In 2012 it was estimated to cost a typical middle income family $812,000 to raise two children from birth until they leave home (AMP/NATSEM report on the cost of kids)1. This was up from $537,000 only five years earlier.

Over the last five-years preschool, primary and secondary education costs have more than doubled.

Higher income families are spending as much as a quarter of their family budget on schooling. So preparing and saving ahead for this expense has become a priority.

The challenge is to find an investment that is both tax-effective and flexible enough to meet your children’s future education needs.

Introducing Investment Bonds

For high-income earners, investment bonds may be a tax effective alternative investment vehicle to save for a child’s education. If funds remain invested for at least 102 years,
then personal tax obligations are reduced to zero after year 102. Bonds can thus provide a significant tax saving, especially if the investor is paying personal tax at the
highest marginal rate.

1 AMP.NATSEM Income and Wealth Report. The Cost of Kids: The cost of raising children in Australia. May 2013
2 Assuming the 125% rule on deposits is not broken and withdrawals are not made within the first 10 years

How are investment bonds taxed?

The investment bond may be ideal tax-effective way to save for future education needs. The bond can be held in the name of a parent, grandparent or child, without impacting that person’s personal tax, provided the money remains invested in the bond for at least 10 years. Earlier withdrawals may see all or some of the growth withdrawn taxed at marginal tax rates.

Tax is paid within the bond effectively capping the maximum tax rate at 30%. After allowing for dividend imputation credits and other tax deductions, the effective rate may be lower.
In contrast, the top marginal rate on personal taxes, inclusive of the Medicare levy, is 49%.

If your clients are looking for tax effective investment alternatives to fund their children’s education, then investment bonds provide a range of benefits to investors seeking more flexibility and diversification.

Investment bonds are a highly attractive savings vehicle for long-term education purposes, particularly for those on a higher marginal tax rate.

Bond Ownership by Minors

  • A child age 10 or older can be the owner of a bond but they will gain full control to decide how to spend the money once they reach age 16.
  • The preferred option may be to hold the investment bond in the name of a parent or grandparent. This avoids penalty tax rates for children under age 18 (if they make withdrawals in the first 10 years) and the adult stays in control. This also allows a Bond to start for a child younger than age 10.

Benefits of investing in an investment bond structure

While the investment bond offers a tax benefit, it also offers many more key benefits that make it a viable option to fund for children’s education. Here are our
top 7.

Affordable –  it is easy to make small regular contributions. Bonds can start with $500 and a regular savings plan can add as little as $100 per month.

Investment choice – offers a choice of diversified investment options as well as an Australian shares option to provide the potential for capital growth over the long term.

Flexibility – if the money is not used for education it can be used for any other purpose with no loss of earnings accrued.

Transfer – a Bond can be transferred to a child at a pre-determined age, called a “vesting age” without triggering capital gains tax.

Tax-effective – tax is paid within the Bond, so tax is capped at a maximum of 30% and does not affect the owner’s taxable income.

Simplicity – it is easy to set up a Bond and a regular savings plan without worrying about taxation each year.

You can download a PDF of the strategy here.

This whitepaper is for the use of Financial Advisors only. This document is not to be provided to retail clients. The examples provided are illustrative only. Suitability of a Centuria Investment Bond will depend on a person’s circumstances, financial objectives and needs, none of which have been taken into consideration in preparing this whitepaper. Prospective investors should obtain and read a copy of the Product Disclosure Statement (PDS) for any investment bond and consider the information in the PDS in light of their circumstances, objectives and needs before making a decision to invest. This document is not an offer to invest in any of Centuria’s Investment Bonds. An investment in any of Centuria’s Investment Bonds is subject to risk as detailed in the PDS. Issued by Centuria Life Limited ABN 79 087 649 054 AFSL 230867.