With the changes in superannuation contribution caps, withholding tax and the abolishment of the CGT 50% discount on Australian property for Foreign Investors it is no wonder why Australian Expatriates are seeking alternative ways to build and protect their wealth whilst residing offshore.
Thankfully becoming an Australian Expat can open up a wide range of tax-efficient investment opportunities and one of those opportunities is called Investment Bonds.
What is an Investment Bond?
Offshore Investment Bonds are highly tax efficient structures. They can help Australian Expats minimize tax should they decide to return home in the near or distant future. Just like Super or unit trusts an investment bond is a structure that has its own set of rules.
How it works:
John lives in Singapore and decides to contribute $300,000 SGD into an offshore Investment Bond which holds an AUD Hedged Managed Fund. Five years later John returns home to Australia and then makes the decision to switch his existing managed fund into a more conservative blue-chip Australian Fund. Usually, a switch of this nature or change in ownership of such units should result in a personal CGT liability, however, switching between investment funds within an investment bond does not result in a personal CGT liability.
In addition, ten years after the commencement of an investment bond, all proceeds will generally be available without any additional tax liability. This means that John may be able to draw down or surrender his policy 5 years after returning home to Australia without suffering a tax liability on the growth of his investment.
Withdrawal Tax Rates. See table below:
| Year | Tax Outcome |
|---|---|
| 8th year or earlier | 100% of earnings assessed at individual’s marginal tax rate (MTR) |
| 9th year | 2/3 of earnings assessed at individual’s MTR |
| 10th year | 1/3 of earnings assessed at individual’s MTR |
| After 10th year | No additional tax payable on earnings |
Not only is there no limit on the amount John can invest in an Investment Bond (Unlike Super) but John’s funds may be accessible at any time. Investment bonds are also especially good for estate planning as they sit outside the will and cannot be challenged.
Investment bonds are proving to be a very tax efficient structure for Australians living in Singapore but like all investments, it is crucial that you seek professional advice before making any investment decision.
