Toolbox Q&A
Question: Are insurance bonds still a viable alternative to invest for children? I recall that the taxation treatment of insurance products such as bonds and endowment policies was going to change and these policies were to be taxed like other managed investments. Do the owners of these products now pay tax along the way with an entitlement to any imputation credits?
Answer:The proposed changes to insurance products with an investment component, such as insurance bonds and bundled policies, were slated under the proposed ‘entity tax regime’. Those changes never happened, and these types of policies retain their particular tax treatment, albeit the internal rate of tax paid on these policies has reduced over the years in line with the tax rate generally paid by life offices and friendly societies.
The investment returns on these products are taxed in the hands of the provider at the company tax rate of 30 per cent. If the bond is held for 10 years or more the returns are distributed tax-paid — that is, with no further tax liability to the owner. If the investment is cashed in prior to 10 years a sliding tax scale applies whereby all, or some, of the earnings proceeds are assessable. A rebate is available to offset assessable income in this case, which is currently also 30 per cent.
As an investment for children there are certain advantages to insurance bonds.
During the course of the investment, no income is distributed to the beneficiaries. As there is no assessable income, a tax return will not be necessary if there is no other assessable income to declare. This also means earnings do not attract the penalty rates that would normally apply to children’s unearned income.
As earnings are not required to be included in the owner’s assessable income, the investment will not affect their eligibility for concessions such as the Senior Australians Tax Offset or the Low-income Tax Offset. It also avoids any effect on their Medicare levy payable and any social security implications. However, if the owner is receiving the aged pension, the investment will be asset tested and deemed.
Of course, fees and charges and the appropriateness of the investment to an individual must always be assessed. Nevertheless, the features inherent in an insurance bond can make it a relatively fuss-free investment when saving for children.
Justine Harris is manager technical services,IntegraTec .
Got a question?
E-mail:[email protected]
Recommended for you
BT is to launch a new low-cost “Focus” investment menu for its Panorama platform this October, in partnership with Vanguard, seeking to compete with industry superannuation funds.
Net gains of financial advisers have already doubled since the start of FY25, according to this week’s Padua Wealth Data, with momentum gathering pace far faster than the previous financial year.
National advice firm MiQ Private Wealth has appointed a new chief executive to lead the business through a “transformative era” after penning a partnership deal with AZ NGA earlier this month.
WT Financial’s managing director, Keith Cullen, believes the firm’s Hubco model with Merchant Wealth Partners will be a “repeatable growth model” for the business as it scales its adviser numbers.
