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Investment bonds are long-term investments that may offer tax efficiency to investors on a high marginal tax rate and those investing for children or grandchildren
Unlike traditional investment products, such as managed funds, bonds are a 'tax paid' investment. This means that tax on investment earnings is paid at the applicable company rate of 30 per cent by the bond issuer – not by you, the investor.
Investors receive ‘tax paid’ returns provided they meet certain conditions – most notably that the investment is held for at least ten years and contributions do not exceed the 125% rule.
Bonds have a valuable taxation status; as long as any additional investments you make do not exceed 125 per cent of the investments made in the previous year, then the taxation status will not be jeopardised. This is called the 125% rule.
By using the 125% rule, a bond investment becomes even more tax effective because it gives you the opportunity to make additional investments (or contributions to a savings plan) each year. The level of additional contributions you can make continues to increase until the end of the tenth anniversary, after which all withdrawals from the bond are tax-free. For example, if you invest $10,000 in year one, then, using the 125% rule, $12,500 (125%* 10,000) may be invested in year 2, and so on.
The following table shows the tax benefits of an investment bond.
Tax paid by bond manager
Tax paid by fund manager
Net return (at maturity)
Tax paid by investor
After tax return
While different investment bonds have different investment menus, generally they include a wide range of diversified funds, multi-manager funds, Australian share funds, international shares, fixed income and capital guaranteed investments.
Investment bonds may be suitable for:
The IOOF WealthBuilder investment bond has a great range of investment options and product features, together with competitive fees.