Investment bonds (also known as insurance bonds) are tax efficient long term investment vehicles.
Investment bonds are structured as a life insurance policy under the Life Insurance Act 1995 and require the life insured and beneficiaries to be nominated. Investment bonds can only be issued by life insurers and friendly societies.
Investment bonds are tax effective for the following reasons:
- Income from the investments is taxed at the 30% corporate rate and the tax is paid by the investment bond issuer.
- If the investor holds the investment bonds for a minimum 10 years then any capital growth on the investment will be tax free.
- The annual investment bond income is not distributed to the investor but reinvested so compounding occurs.
Investment bonds now include a wide variety of investment options including diversified funds, multi-manger funds, capital guaranteed, Australian share funds, bond funds, etc.
The returns generated by the investment bonds will be dependent on how the underlying investments perform.
Investment bonds are attractive to investors in high tax brackets (higher than 30%), investors with long-term investing horizons (more than 10 years), and investors who don’t require regular income.