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A Tax Paid Investment – What’s the Catch

By February 19, 2021February 22nd, 2021No Comments

In previous blogs, we have discussed how different investment strategies can assist you to achieve goals through your various life stages.  From using regular investment plans earlier in life, to superannuation strategies nearing your retirement. 

When a young family comes to see me, the discussion is often about cashflow and mortgages. At a time when the household would most likely be on a single income,  it is understandable.  

However this is the time a little forward planning can really pay off. Much like planning for your retirement from the first day you start work, planning for your family’s finances early can greatly reduce the burden in the future.  

And much like superannuation, there is an investment vehicle that can assist you in reaching your family’s financial goal – an Investment Bond. 

What is it?

Sometimes called an Insurance Bond, it is a tax paid investment. Tax is paid internally within the investment at the corporate tax 30% p.a.  As long as it is held, you do not include annual earnings from the investment in your tax return. 

Once you withdraw the investment, the amount of earnings (growth in your investment) may be assessable. This depends on how long you held the investment for.

Tax Assessment of Earnings

Year of WithdrawalAmount to be included in your Assessable Income
Within 8 Years100% of Earnings Less 30% tax offset
In the 9th Year2/3 of Earnings less 30% tax offset
In the 10th Year1/3 of Earnings less tax offset
After the 10th YearTax Free and not included in your assessable income

How Does it work:

  • Once established, the full tax benefit will be received if you hold the investment for 10 years.  
  • You can however add to the investment by what is called the 125% rule. You can contribute up to 125% of the previous year’s contribution and it will be considered as a part of the original investment. 
  • Should you exceed 125%, the 10 year term is reset. 
  • The investment platform allows you to invest in a range of asset classes. It allows for you to customise your portfolio to your risk profile. 

An Investment Bond could be used to reach a medium term goal, such as in our example – education expenses. Once your child is born, you establish an investment bond account. You contribute a regular investment (within the 125% rule) into the account. When your child is old enough for high school you can draw on this tax effective investment to meet costs. 

Like any investment, there are pros and cons. The suitability of an investment bond as a part of your portfolio should be assessed by a professional adviser. If you wish to discuss this, or any other facet of your finances, schedule a no obligation Discovery Meeting with us.

Discovery Wealth – Trusted Financial Adviser in the Hills.

The views expressed in this publication are solely those of the author; they are not reflective or indicative of RI Advice Group’s position and are not to be attributed to RI Advice Group. They cannot be reproduced in any form without the express written consent of the author. Louella Jorge is an Authorised Representative of RI Advice Group Pty Ltd, ABN 23 001 774 125 AFSL 238429. This editorial does not consider your personal circumstances and is general advice only. It has been prepared without taking into account any of your individual objectives, financial solutions or needs. Before acting on this information, you should consider its appropriateness, having regard to your own objectives, financial situation and needs. You should read the relevant Product Disclosure Statements and seek personal advice from a qualified financial adviser before you act.

Discovery Wealth Advisers

Author Discovery Wealth Advisers

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