Investment bonds could help you save on tax
INVESTMENT bonds, once called insurance bonds, are rapidly growing in popularity as super loses its attractiveness as a tax saving tool.
The tax rate paid by the bond fund is a flat 30%, there is no Medicare levy, no limit on contributions and you can access your money at any stage.
Unfortunately, there are still misunderstandings about access. Your money is not tied up for 10 years and you can withdraw all or part of the balance whenever you wish. If you do withdraw your money early, the profits will be taxable, but you will be entitled to a 30 per cent rebate to compensate for the tax paid by the fund.
Sometimes it is better to redeem the bond early. Think about Sue who was given a $10,000 share based investment bond by her grandparents seven years ago. If the bond earns 8% per annum it would now be worth $17,000. The purpose of the gift was to assist with her university education and Sue, now aged 21, is earning $24,000 a year from casual work. She could wait for three years and have all the proceeds tax-free, or cash the bond in now.
If she cashed the bond in now the profit of $7000 would be added to her taxable income, but would carry with it a tax credit of $2100. Her taxable income would become $31,000 on which tax payable would be $1987.
The tax credit has wiped out the tax on redemption of the bond as well as the tax due on her income from casual work. Redeeming the bond early gives a much better outcome.
A major benefit of investment bonds is that they can be transferred to another party free of capital gains tax at any time..
Most investment bonds offer a range of investment options such as Australian shares, international shares and fixed interest. A special benefit is that you can move between these options at will without paying capital gains tax - no other investment vehicle offers this.
There are a range of bonds such as the IOOF WealthBuilder, and the Austock bond. All have different features so make sure you take advice to ensure the bond you end up with fits your goals and your risk profile.
Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. Email: firstname.lastname@example.org