Are Investment Bonds About to Become a More Tax-Effective Way to Build Wealth?

[gentle music] Okay, well let's start with what exactly is an investment bond? Now, despite its name, an investment bond isn't really a bond in the conventional investment sense.

You're not necessarily investing in fixed interest, which is what a bond normally suggests.

An investment bond is better thought of as a tax structure or an investment wrapper you sometimes see it referred to.

Within that structure, you can typically invest in a range of assets, Australian shares, international shares, property securities, fixed interest, a- and diversified portfolios.

The important distinction is how the investment is taxed.

Rather than investment earnings being distributed to you each year and included in your personal tax, tax is paid within the investment bond structure, exactly the same as happens in your super fund.

The headline tax rate within an investment bond is thirty percent, but importantly, that doesn't necessarily mean the actual tax paid is thirty percent.

Depending on the investments held, there's deductions, there's franking credits, there might be foreign tax credits too, so that can o- often reduce the effective tax rate below that sort of headline thirty percent level.

Now, of course, if you own the investments in your own name, you'd also be claiming those credits, so, you know, swings and roundabouts on that.

But for someone paying the top marginal tax rate particularly, you've potentially created a significantly lower tax environment in which to compound wealth.

Until now, however, investment bonds have had to compete with the very generous fifty percent capital gains tax discount available to individuals and trusts a- and that's often made the comparison, you know, not so compelling.

But the new tax regime with this minimum thirty percent tax, all of a sudden, you know, it, it, it changes the equation quite significantly.

Investment bonds, again, you know, very similar to superannuation, for them to be useful and valuable, they're really about long-term investment a- and compounding.

So the interesting thing a- about investment bonds i- isn't just the tax rate, it's also when you pay the tax and how much administration is created along the way.

So imagine you're building a portfolio outside of super, and you've got some Australian share exposure, some international share exposure, you know, perhaps some different funds as well.

Over time, there's distributions, there's dividends, capital gains, uh, a- and you might make some portfolio changes too, and these all create personal tax consequences, right? You've got to include them in your personal tax return.

If you're using a managed fund, it, it could even be that because of changes that the fund manager makes, you might get a, a taxable capital gain distribution even though actually you never personally sold anything.

Well, an investment bond works differently.

Tax is dealt with internally.

You don't generally receive, uh, annual taxable distributions that need to be included in your personal tax return.

You can also switch between investment options within the bond without personally triggering capital gains tax whenever you make a change.

So that potentially creates a very useful long-term compounding environment.

And after an investment bond has been held for ten years, withdrawals can generally be made without additional personal tax, uh, being due.

Now, there are rules around this, a- and one of which is the hundred and twenty-five percent rule, which governs additional contributions.

So investment bonds aren't something you simply throw money into without understanding the structure, right? There is a little bit of nuance here.