In 2017 the Federal Government once again reduced the contribution caps in Superannuation. From July 1 2017 the maximum amounts you can contribute to Super each year are now capped at $25,000 Concessional (before tax) and $100,000 Non-Concessional (after tax) per year, which will make it more challenging to generate long term wealth and minimise your tax inside Superannuation. Due to these changes many individuals now are considering alternative wealth creation strategies outside of Super and one of the most flexible options is Investment Bonds.
What are investment bonds?
Investment bonds are designed to provide tax-effective investment solutions to your real-life challenges; ‘How do I build wealth tax effectively?’, ‘how can I give my children financial security?’ and ‘how can I pass on my wealth to loved ones without burdening them with additional tax?’
The 10-year advantage of investment bonds
Investment bonds are tax-paid investments, meaning that when earnings are received, they pay tax at a rate of up to 30%. If your marginal tax rate is higher than 30%, this makes investment bonds a great tax-effective long-term investment – as investment income is NOT added to your personal tax liabilities.
If you invest in the bond for at least 10 years, your growth on the entire investment, including additional contributions, will be tax paid, and withdrawals after the 10th anniversary will be free of any personal tax in your hands – subject to the rules around the 125% opportunity. Also, you will not attract any capital gains tax on withdrawal or when switching between investment options.
The 125% opportunity
Your investment bond is designed to be held for at least 10 years to be the most tax effective and offers the continued flexibility to make additional contributions over the life of the investment bond.
While there is no limit on how much you can contribute in your first year, each year following, you can continue to add up to 125% of the previous year’s contributions, without extending your 10-year term for tax purposes. This means, the contributions you make along the way also receive full tax benefits.
Access to funds
It is your money so it is important to know you can access it at any time.
However, it’s worth remembering that if you do withdraw part or all of your investment before the 10 years is up, some of the earnings may be taxable, depending on when the withdrawal is made (although you will get a tax offset back).
Investment Bonds are suitable for:
Funding your child’s education costs
A tax-effective investment solution to help save and pay for a child’s education costs.
The cost of educating a child can be significant. Starting to save earlier and using the power of compounding investment returns can help.
Using a regular savings plan and increasing the level of contributions each year can help ease the financial burden in future years.
There are no restrictions on how much you can invest, and your earnings are generated in a tax friendly environment.
Saving for retirement
A tax-effective investment solution with no restrictions such as contribution caps, age limits or ‘work tests’. You can also access your funds before retirement age, with no restriction on how much you can access.
Smart, tax-effective investing for higher-income earners
A tax-effective investment solution if you’re on a marginal tax rate higher than 30%.
Transferring your wealth
A simple, easy and cost-effective way to control how your investment is passed on to your family or others, with certainty. You choose when your wealth can be accessed and how much can be drawn
Manage income levels in private or family trusts
A tax-effective solution to managing the level of distributable income generated by a trust.
Assists pension benefits, aged-care fees and other government benefits.
Manage your income to improve pension entitlements, reduce aged-care resident fees and access other government benefits.
Key Features of an Investment Bond
- Investment earnings are taxed at a maximum rate of 30% and after 10 years all earnings are tax-free
- Minimal to no tax reporting (No TFN required)
If you would like to discuss further, please feel free to get in touch!
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