When a policyholder makes a withdrawal from an insurance bond after the 10 year eligible period, no tax is personally payable by the policyholder. However, the earnings on assets supporting the insurance bond continue to be taxed at the insurance company tax rate of 30%.
Insurance Bond Taxation
Insurance bonds (also known as investment bonds or growth bonds) are technically life policies with an investment component. Unlike managed investment trusts, insurance bonds do not distribute income such as rent, dividends, interest or realised capital gains received. Instead, the issuing life company pays tax on these amounts at the corporate rate of 30% with the balance reinvested to increase the surrender or withdrawal value of the insurance bond. The actual rate of tax paid by the life company may be reduced using imputation credits and any other deductions or offsets available to the life company.
Many people are familiar with the fact that insurance bonds generally have an 'eligible period' of 10 years . The eligible period starts from the commencement of the policy but it can be restarted if the contributions to the insurance bond in any year exceeds 125% of the contributions made in the previous policy year. A policy year commences on each anniversary date of the commencement of the insurance bond.
Withdrawals made after the 10 year eligible period will not result in any further tax to pay by the policyholder personally. However, earnings derived from assets supporting the insurance bond will be subject to tax within the product at the insurance company tax rate of 30%, irrespective of how many years the insurance bond has been owned by the policyholder. The tax payable by the insurance company then impacts the net return the policyholder receives on their investments in the insurance bond.
Example
Rachel invested $10,000 into an insurance bond on 15 May 2014.
On 15 May 2024, the 10 year eligible period has been met and Rachel is able to withdraw amounts from the insurance bond without incurring personal taxation.
Assume the insurance bond is a unitised product, the unit price reflects any fees, expenses or tax payable by the insurance company on investment earnings, including provision for any unrealised capital gains tax.
If Rachel decides to retain the insurance bond, the insurance company will continue paying tax at the insurance company tax rate of 30% on the earnings on assets supporting the insurance bond, including any assessable capital gains.
Note: Insurance companies are not eligible for the 50% discount on capital gains from the disposal of assets held longer than 12 months. Therefore the 50% discount does not apply to any capital gains realised on assets supporting the insurance bond.
Endnotes
1. A different eligible period applies to investments commenced prior to 8 December 1983.
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Disclaimer
The information contained in this update is based on the understanding Avanteos Investments Limited ABN 20 096 259 979, AFSL 245531 (AIL) and Colonial First State Investments Limited ABN 98 002 348 352, AFSL 232468 (CFSIL) has of the relevant Australian laws as at the article date. As these laws are subject to change you should refer to our website at www.cfs.com.au or talk to a professional adviser for the most up-to-date information. The information is for adviser use only and is not a substitute for investors seeking advice. While all care has been taken in the preparation of this document (using sources believed to be reliable and accurate), no person, including AIL, nor CFSIL, accepts responsibility for any loss suffered by any person arising from reliance on this information. This update is not financial product advice and does not take into account any individual’s objectives, financial situation or needs. Any examples are for illustrative purposes only and actual risks and benefits will vary depending on each investor’s individual circumstances. You should form your own opinion and take your own legal, taxation and financial advice on the application of the information to your business and your clients.
Taxation considerations are general and based on present taxation laws and may be subject to change. You should seek independent, professional tax advice before making any decision based on this information.
AIL and CFSIL are also not a registered tax (financial) adviser under the Tax Agent Services Act 2009 and you should seek tax advice from a registered tax agent or a registered tax (financial) adviser if you intend to rely on this information to satisfy the liabilities or obligations or claim entitlements that arise, or could arise, under a taxation law.