As Australia’s financial landscape evolves, high-net-worth individuals are increasingly exploring alternative wealth accumulation strategies. One such vehicle that has gained renewed attention is the investment (insurance) bond—a flexible, tax-effective structure that offers compelling benefits, especially in-light of the proposed Division 296 superannuation tax reforms.
Investment (Insurance) Bonds – The Basics
An investment (insurance) bond is a long-term investment product typically offered by life insurance companies. It combines elements of investment and insurance, allowing individuals to invest in a range of asset classes while benefiting from a capped tax rate of 30% on earnings, paid by the provider. This structure can be particularly attractive for those seeking simplicity, estate planning benefits, and legislative stability.
Common features include:
- Lump sum or regular contribution options.
- Tax-paid status at a maximum rate of 30%, potentially lower depending on deductions/tax effectiveness of investments selected
- Tax-free withdrawals after 10 years, subject to the 125% contribution rule.
- Switchable investment options
- Tax-free distribution to nominated beneficiaries upon the death of the last life insured
It is important to bear in mind, however, that different providers offer varying features, such as investment options, fee structures, withdrawal rules, education funding flexibility, and estate planning tools. It’s essential to compare offerings to find one that aligns with your financial goals and circumstances.
Division 296: Why Investment Bonds Are Back in Focus
Division 296 introduces an additional 15% tax on earnings from superannuation balances exceeding $3 million, bringing the total tax on those earnings to 30%.
This includes both realised and unrealised gains, which has raised concerns about valuation complexity and fairness.
This change is prompting high-net-worth individuals to plan for restructuring, and diversify outside of superannuation, and can work complimentary to other traditional wealth structures such as the discretionary family trust and investment companies. Investment (insurance) bonds are emerging as a tax-effective alternative, offering:
- Legislative stability: Unlike super, investment bonds are not subject to frequent policy changes.
- No contribution caps: Unlike superannuation, there are no annual limits (subject to the 125% rule).
- Estate planning advantages: Bonds can bypass probate and offer confidential, tax-effective wealth transfer.
- Tax arbitrage: For individuals on marginal tax rates above 30%, investment bonds can offer a more efficient tax outcome outside of other traditional structures or individual marginal tax rates. It can even be used as a tool to reduce taxable income from Trust structures.
Final Thoughts
As Division 296 reshapes the superannuation landscape, investment (insurance) bonds offer a stable, flexible, and tax-effective solution for long-term wealth planning. Whether you’re focused on education, estate planning, tax-effective building of wealth, or diversifying outside of super, these bonds provide a powerful tool for modern investors.
Of course, before determining whether this structure is right for your specific situation, it is important to discuss this option with a financial adviser, so that you can make an informed decision about whether it makes sense to form part of your wider wealth-building and estate plan.
