A case study for using investment bonds

This week this week I will continue discussing investment bonds.

They are becoming more and more popular now that the marginal tax rate above $37,000 a year has been increased to 32.5%, and because the amount that can be placed in superannuation is now restricted.

As I pointed out last week they are a tax paid investment, with the bond fund paying tax of up to 30% on your behalf. 

They also offer significant capital gains tax advantages.  They can be transferred from one investor to another at any time without capital gains tax, and most investment bond issuers allow a range of options within the bond, and you can switch between them without capital gains tax whenever you feel it is appropriate.;. 


Peter and Joan are a high income couple - they invest $200,000 in an investment bond in Peter's name. 

Because they believe the share market is at a low point they ask for the entire investment to be placed in the Australian shares option. 

Three years later the market has surged and they decide to take some profits. 

All they have to do is make a free switch from the share based option to the more conservative cash option. This will be free of capital gains tax irrespective of how long the bond has been held. 

Four years later they have a major change in their circumstances and decide to redeem the bond to renovate their home as Joan had stopped work to have a baby. 

Before the bond is cashed in, Peter transfers it to Joan free of CGT - the result is the entire proceeds are tax free as Joan earns no income in that year.

I am often asked what kind of returns one can expect from an investment bond. It's no different to asking what returns you can expect from your superannuation. An investment bond is not an asset class of its own like property or shares but merely a structure that lets you hold assets in a tax concessional environment. The performance of your bond will depend entirely on the performance of the assets it holds.

Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. Email: noelwhit@gmail.com.