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An investment bond is a ‘tax-paid’ investment. If you satisfy the rules of the bond, no further tax will become payable as it has already been paid. This can be very attractive to those who pay a marginal tax rate above 30%.

What is an Investment Bond?

An investment bond is a ‘tax-paid’ investment. If you satisfy the rules of the bond, no further tax will become payable as it has already been paid. This can be very attractive to those who pay a marginal tax rate above 30%.

Who is it generally suitable for?

  • High income earners wanting to save for a specific goal.
  • If you have reached your transfer balance cap in super and want to continue savings through other means.
  • If you want to have tax-effective savings pre-retirement.
  • If you are a trustee wanting to reduce your distribution of income requirements within a family trust.
  • If you want to transfer wealth to another individual, company or trust.

What are the rules?

If you hold your investment for more than 10 years from the original investment date, you do not pay any further personal tax on withdrawals made after this time, subject to these 125% rule requirements: You can contribute as much as you wish during the first year of your investment. However, subsequent years contributions are each limited to 125% of the previous year’s contribution, to avoid restarting the 10-year tax period.

  • An investment year is considered each 12-month period from your investment’s original start date.
  • If you make an additional contribution in excess of the 125% limit, the 10-year period will start again for the entire investment.
  • If you do not make any contribution in a particular year, any contributions in following years will reset the 10-year rule.
  • If you wish to invest more than 125% of the previous investment year’s contributions, it may be more appropriate to start a new investment.
  • After the 10th year, earnings on each additional contribution receive immediate tax-free withdrawal status.

What are the benefits?

  • Income from your bond may be tax free if you hold the bond for 10 years, do not make withdrawals and meet the 125% contribution rule.
  • Bonds paid to beneficiaries directly will be tax free.
  • Bonds are generally most tax-effective when your marginal tax rate is above 30%.
  • If your personal tax rate is below the life insurance tax rate of 30%, an excess tax offset may help reduce your tax on any other assessable income earned in the same tax year.

What should I be thinking about?

  • To receive the tax benefits, you need to hold the investment for 10 years, not make withdrawals and not contribute more than 125% of the previous year contributions in any one year.
  • There will be fees payable for the establishment and ongoing management of the bond.
  • If you must redeem some or all of the investment bond prior to the completion of the ten-year period, the following tax is likely to be payable:

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Important information regarding this information

This information is of a general nature. It does not consider your personal objectives, needs or situation. It does not represent legal, tax or personal advice and should not be taken as such. If it has been provided to you with a Statement of Advice (SoA), you should rely on the personal advice in the SoA.

Care has been taken to provide up to date and accurate information relating to the subject area however BR Advice Pty Ltd (ABN 30 612 056 523, AFSL 488655), Blue Rock Private Wealth Pty Ltd (ABN 95 166 927 055, AFSL 452733) and their representatives make no representation as to its accuracy or completeness.

Published: February 2021.

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