Does your investment bond provide a tax effective way to invest when you live in Australia?
Life assurance policies have been part of the Australian financial marketplace for many years with Australia first introducing a provision for taxing amounts paid under life assurance policies into the Income Tax Assessment Act 1936 on 12 April 1984.
However, it is not only Australia who recognises the potential value in combining the concept of an investment bond with a life insurance policy. These financial products are becoming increasingly popular in many parts of the world, specifically in the Asian financial market.
So much so that certain providers of these products within the Asian financial market have extended their investment reach and now allow be-spoke investment options, which under certain circumstances, allow investments such as private equity and single asset strategies to be held within their life assurance wrapper.
Although Australia provides its own investment bond products, the legislation does not discriminate against offshore products who meet the same ‘eligible policy’ definition.
Therefore, it is possible for Australian expats or those immigrating to Australia to apply the provision to their offshore bond in the same was as if it were a bond issued from an Australian provider.
However, the danger lies where your bond does not meet the ‘eligible policy’ definition within Australia’s legislation and as such you lose the beneficial tax treatment on your investment return when you hold the bond as an Australian tax resident.
Therefore, rather than just focusing on the investment return within the bond, it is important to understand the terms and conditions of the bond and how these are applied to Australia’s tax provisions.
To illustrate the different Australian tax treatment on bonds we take Mr H’s 99-year term bond and compare it to Mrs K’s bond which is linked to her husband’s life. Both bonds have a starting value of $1m returning a 7% investment return where all earnings are retained and reinvested within the bond.
Mr H’s bond does not meet the definition of an ‘eligible policy’ under Australia’s legislation resulting in Mr H being subject to Australian income tax on the earnings of the bond each year. If Mr H is on the top tax rate of 47% the tax payable over a 10-year period Mr H must pay is $454,561 from his other cash reserves.
In contrast Mrs K’s bond does meet the definition of an ‘eligible policy’. Where the earnings are retained in the bond no Australian tax is paid on any of the earnings.
This proves, if Mr H obtained the correct tax advice prior to his relocation to Australia he would have saved $454,561. Don’t be Mr H – reach out on firstname.lastname@example.org and Let’s Talk Tax.
This information has been prepared in good faith, is general comment only, and neither purports, nor is intended, to be advice on any matter. You should not act or rely upon any matter or information contained in or implied without taking appropriate professional advice which relates specifically to your circumstances. Torque Tax Pty Ltd expressly disclaims all and any liability to any person (whether a reader or not) who acts or fails to act as a consequence of reliance upon the whole or any part of this information.