1. finance
2. investing
3. funds
4. hedge fund

Investment Bonds Update
What is an Investment Bond?
Investment Bonds (otherwise known as Insurance Bonds) are long-term investment
vehicles which may offer tax efficiency to some investors. Investment Bonds are
technically life insurance policies under the Life Insurance Act 1995 and require a Life
Insured and beneficiaries to be nominated. Investment Bonds can be issued by life
insurers and friendly societies. Historically, these bonds incorporated a life insurance
element, however most are now purely investment vehicles focusing on wealth
creation.
Investment Bonds are designed to be held for at least 10 years, although
investors can access their funds at any time. Regular contributions are permitted. A
wide range of investment options are available within an Investment Bond structure,
including diversified funds, multi-manager funds, Australian share funds, international
equities, fixed income and capital guaranteed. Investment Bonds do not distribute
regular income to investors. Instead, income is effectively re-invested into the bond to
achieve a compounding effect.
The current tax system makes Investment Bonds a tax-effective way to generate
long-term returns. Investors contributing a lump sum or regular amounts for ten years
or more receive ‘tax paid’ returns provided certain conditions are met. Income from
investments is taxed at the corporate rate of 30% by the Investment Bond Issuer,
meaning investment earnings are not required to be included in an investor’s tax
return.
Who should invest in Investment Bonds?
Investment bonds may be suited to:
•
Investors with a long-term investment horizon (10+ years)
•
Investors with a tax rate higher than 30%
•
Investors aged between 65 and 74 who do not currently meet the work test for
superannuation
•
Investors who have never been in the workforce so cannot invest in
superannuation
•
Investors who have reached their annual contribution limits in superannuation
•
Parents / grandparents wishing to invest on behalf of children
•
lower income earners and retirees looking to maximise their potential eligibility for
income-tested tax offsets
•
Investors who do not require regular income
Lonsec Limited ABN 56 061 751 102 • AFSL No. 246842 • Market participant of ASX Group and
Lonsec Research Pty Ltd ABN 11 151 658 561 who is a Corporate Authorised Representative of Lonsec Limited (together referred to as “Lonsec”)
This information must be read in conjunction with the Warning, Disclaimer, and Disclosure at the end of this document
1
Investment Bonds Update
Key Features
Tax Paid
One of the features of investing in Investment Bonds over a mainstream managed
fund is that it is a tax paid investment. Issuers of Investment Bonds pay the corporate
tax rate of 30% on the earnings on the investor’s behalf. Conversely, an investment in
a mainstream managed fund generally requires tax to be paid on earnings at an
investor’s marginal tax rate. Dividend imputation credits can further reduce the
amount of tax payable.
The following table shows the potential taxation consequences of investing in an
Investment Bond versus a Managed Fund. The table assumes investment income of
$100,000 and a marginal tax rate of 45%.
Investment Bond
Managed Fund
Investment earnings
$100,000
Investment earnings
Tax Paid by manager
$30,000
Tax Paid by manager
Net Return (at maturity)
$70,000
Assessable Income
$100,000
Tax Paid by Investor
($45,000)
Assessable Income
After Tax Return
0
$70,000
After Tax Return
$100,000
0
$55,000
Funds are accessible
Unlike superannuation where strict conditions of release (including reaching the
preservation age) must be satisfied before accessing funds, investors in Investment
Bonds have access to their investment at all times.
Regular Contributions are permitted
Unlike superannuation, there are no government-imposed contribution limits.
Assets Test Treatment
Investments held in Investment Bonds are treated as financial assets and are
counted as assets under the assets test.
Investment Bonds can be used as security for a loan, which is generally not possible
with superannuation assets. If a loan is taken out and is secured against the
Investment Bond, all financing costs (including interest paid) in relation to the loan
may be deductible.
Lonsec Limited ABN 56 061 751 102 • AFSL No. 246842 • Market participant of ASX Group and
Lonsec Research Pty Ltd ABN 11 151 658 561 who is a Corporate Authorised Representative of Lonsec Limited (together referred to as “Lonsec”)
This information must be read in conjunction with the Warning, Disclaimer, and Disclosure at the end of this document
2
Investment Bonds Update
Capital Gains Tax

Any investment growth received by the investor should ordinarily not be
subject to CGT.

There are generally no CGT consequences for investors who switch between
underlying investments strategies within the Investment Bond’s structure i.e.
switching between the high growth to capital stable option.

Where no consideration is passed (gift or inheritance), ownership of the
Investment Bond can generally be assigned to another person without any
CGT consequences.

Ownership of the Investment Bond can be transferred to a minor without
incurring any CGT consequence under a ‘Child Advancement Option’. A
‘Child Advancement Option’ is a system where the policy is automatically
transferred to the child at a nominated age between 10 and 25.
Minors Tax Rates
Earnings on Investment Bonds owned by children under 18 (but over 10) are taxed at
30%. Children under 10 cannot invest in an Investment Bond.
Death, Illness, Financial Hardship
The Australian Taxation Office (ATO) has advised that the following events constitute
a maturity resulting in no assessment for tax:

Death of the owner of the Investment Bond

Accident, illness or other disability of the owner of the
Investment Bond

Severe financial hardship
10 year tax rule
If an investor has held an Investment Bond for 10 years or more, earnings do not
need to be declared in tax returns and no additional personal tax or capital gains tax
is payable. If an investor does withdraw prior to the ten year period, they will need to
declare the earnings in their tax return. Tax offsets are available for withdrawals
made within the specified withdrawal periods outlined below:
Time of Withdrawal
Within 8 years
th
During the 9 year
Tax Payable
All of the earnings are taxed at the marginal tax rate with a tax offset
of 30%
1/3 of earnings are tax paid
2/3 of the earnings are taxed at the marginal tax rate with a tax offset
of 30%
th
During the 10 year
2/3 of earnings are tax paid
1/3 of the earnings are taxed at the marginal tax rate with a tax
offset of 30%
th
After 10 year
All earnings are tax paid
Lonsec Limited ABN 56 061 751 102 • AFSL No. 246842 • Market participant of ASX Group and
Lonsec Research Pty Ltd ABN 11 151 658 561 who is a Corporate Authorised Representative of Lonsec Limited (together referred to as “Lonsec”)
This information must be read in conjunction with the Warning, Disclaimer, and Disclosure at the end of this document
3
Investment Bonds Update
The 125% Rule
Investors can make additional contributions to their Investment Bond each year of up
to 125% of a previous year’s contributions with the benefit of these contributions
being treated as if they were invested at the same time of the original investment.
Upon expiry of the full ten year term these additional contributions also acquire a tax
paid status.
If additional contributions exceed 125% a previous year’s contribution, the ten year
term will re-set and a new ten year period is deemed to commence.
The following examples outline Investment Bond maturity dates under different
scenarios:
Example 1
Example 2
Years
Contribution
Maturity
Years
Contribution
Maturity
Jan-2010
$10,000.00
Jan-2020
Jan-2010
$10,000.00
Jan-2020
Jan-2011
$12,500.00
Jan-2020
Jan-2011
$12,500.00
Jan-2020
Jan-2012
$15,625.00
Jan-2020
Jan-2012
$15,625.00
Jan-2020
Jan-2013
$19,531.00
Jan-2020
Jan-2013
$25,000.00
Jan-2023
Jan-2014
$24,414.00
Jan-2020
Jan-2014
$31,250.00
Jan-2023
Jan-2015
$30,518.00
Jan-2020
Jan-2015
$39,062.00
Jan-2023
Jan-2016
$38,147.00
Jan-2020
Jan-2016
-
Jan-2023
Jan-2017
$47,684.00
Jan-2020
Jan-2017
-
Jan-2023
Jan-2018
$59,605.00
Jan-2020
Jan-2018
$50,000.00
Jan-2028
Jan-2019
$74,506.00
Jan-2020
Jan-2019
-
Jan-2028
Total Allowable
Contribution
for tax paid
status
$332,530.00
Jan-2020
Total Allowable
Contribution
for tax paid
status
$183,437.50
Jan-2028
•
Investors can contribute as much as they wish during the first year.
•
If investors make additional contributions in excess of the 125% limit, the 10 year
period to achieve tax paid status will re-set to the beginning of the investment year
that the excess payment was made (as per Example 2, the contribution made in Jan2013 causes a re-set as it exceeds 125% of the previous contribution).
•
If investors do not make an additional contribution during an investment year, no
further contributions can be made without re-setting the 10 year period (as per
Example 2, no contribution was made in Jan-2016, causing a re-set when
contributions resume in 2018).
•
Investors can continue to take advantage of the 125% opportunity after the 10 year,
in which case earnings on each additional contribution receive immediate tax paid
status.
th
Lonsec Limited ABN 56 061 751 102 • AFSL No. 246842 • Market participant of ASX Group and
Lonsec Research Pty Ltd ABN 11 151 658 561 who is a Corporate Authorised Representative of Lonsec Limited (together referred to as “Lonsec”)
This information must be read in conjunction with the Warning, Disclaimer, and Disclosure at the end of this document
4
Investment Bonds Update
Risks
Some of the risks that should be considered prior to investment include:
 Underlying Investment Fund Risk Different investment funds have different risk /
return profiles. A fund’s profile can be affected by factors such as its strategies,
managers, investments, the markets in which it operates and their volatility.
Leverage, currency risk, derivatives or less liquid investments might be used by some
investment funds. Poor performance of an investment fund can affect the returns and
value of the relevant Investment Bond.
 Financial strength of the provider There is the risk that the life company or friendly
society issuing the Bond could potentially fail in its financial obligations to its
investors.
 Taxation risk As is the case with any investment there is no guarantee that the
taxation treatment of Investment Bonds will remain the same.
Who can invest in Investment Bonds?
•
Individuals aged 16 years and over
•
Children aged 10 – 16 with parental (or guardian) consent
•
Organisations, Companies and Trusts
•
Joint Owners
These comments constitute ‘General Advice’ only and Lonsec advises potential
investors to consult a taxation specialist before making a decision to invest (or not to
invest) based upon these taxation considerations. Intending investors should refer to
the relevant taxation pages of the prospectus of the underlying fund for more
information regarding the taxation of unit holders.
Lonsec Limited ABN 56 061 751 102 • AFSL No. 246842 • Market participant of ASX Group and
Lonsec Research Pty Ltd ABN 11 151 658 561 who is a Corporate Authorised Representative of Lonsec Limited (together referred to as “Lonsec”)
This information must be read in conjunction with the Warning, Disclaimer, and Disclosure at the end of this document
5
Investment Bonds Update
Lonsec Rated Investment Bond Managers
Fund Name
APIR
Rating at July 2012*
Aust Unity Balanced Growth Bond
AUS0313AU
Investment Grade
(Closed to new
investors 30/6/10)
Aust Unity Conservative Growth Bond
AUS0312AU
Investment Grade
(Closed to new
investors 30/6/10)
Aust Unity High Growth Bond
AUS0101AU
Investment Grade
(Closed to new
investors 30/6/10)
CommInsure Capital Guaranteed Cash Fund
FSF0039AU
Recommended
CommInsure Fixed Interest Fund
FSF0039AU
Recommended
CommInsure Property Fund
FSF0454AU
Investment Grade
CommInsure Australian Equities Fund
CFM0404AU
Recommended
CommInsure International Equities Fund
FSF0047AU
Hold
CommInsure Stable Fund
FSF0008AU
Investment Grade
CommInsure Managed Fund
FSF0008AU
Investment Grade
ING Investment Savings Bond Australian Shares - EF
MMF0097AU
Fund Watch
ING Investment Savings Bond Australian Shares - NEF
MMF0096AU
Fund Watch
ING Investment Savings Bond Balanced - EF
MMF0035AU
Fund Watch
ING Investment Savings Bond Balanced - NEF
MMF0034AU
Fund Watch
ING Investment Savings Bond Capital Stable - EF
MMF0203AU
Fund Watch
ING Investment Savings Bond Capital Stable - NEF
MMF0213AU
Fund Watch
ING Investment Savings Bond Diversified Fixed Interest - EF
MMF0951AU
Fund Watch
ING Investment Savings Bond Diversified Fixed Interest - NEF
MMF0943AU
Fund Watch
ING Investment Savings Bond Emerging Companies - EF
MMF0099AU
Fund Watch
ING Investment Savings Bond Emerging Companies - NEF
MMF0098AU
Fund Watch
ING Investment Savings Bond Managed Growth - EF
MMF0204AU
Fund Watch
ING Investment Savings Bond Managed Growth - NEF
MMF0214AU
Fund Watch
ING Investment Savings Bond Tax Effective Income - EF
MMF0958AU
Fund Watch
ING Investment Savings Bond Tax Effective Income - NEF
MMF0950AU
Fund Watch
ING Investment Savings Bond ING Protected Growth Fund No. 2–
EF
MMF1189AU
Recommended
ING Investment Savings Bond ING Protected Growth Fund No. 2NEF
MMF1190AU
Recommended
ING Investment Savings Bond ING Sustainable Investments Australian Shares - Entry Fee
MMF1187AU
Recommended
ING Investment Savings Bond ING Sustainable Investments Australian Shares - Nil Entry Fee
MMF1188AU
Recommended
ING Investment Savings Bond Optimix Australian Shares - EF
MMF0952AU
Recommended
ING Investment Savings Bond Optimix Australian Shares - NEF
MMF0944AU
Recommended
ING Investment Savings Bond Optimix Balanced - EF
MMF0953AU
Recommended
ING Investment Savings Bond Optimix Balanced - NEF
MMF0945AU
Recommended
ING Investment Savings Bond Optimix Global Shares - EF
MMF0954AU
Recommended
ING Investment Savings Bond Optimix Global Shares - NEF
MMF0946AU
Recommended
ING Investment Savings Bond Optimix Growth - EF
MMF0955AU
Recommended
Lonsec Limited ABN 56 061 751 102 • AFSL No. 246842 • Market participant of ASX Group and
Lonsec Research Pty Ltd ABN 11 151 658 561 who is a Corporate Authorised Representative of Lonsec Limited (together referred to as “Lonsec”)
This information must be read in conjunction with the Warning, Disclaimer, and Disclosure at the end of this document
6
Investment Bonds Update
Fund Name
APIR
Rating at July 2012*
ING Investment Savings Bond Optimix Growth - NEF
MMF0947AU
Recommended
ING Investment Savings Bond Optimix Moderate - EF
MMF0956AU
Recommended
ING Investment Savings Bond Optimix Moderate - NEF
MMF0948AU
Recommended
ING Investment Savings Bond OptiMix Geared Australian Shares Entry Fee
MMF1181AU
Recommended
ING Investment Savings Bond OptiMix Geared Australian Shares Nil Entry Fee
MMF1182AU
Recommended
ING Investment Savings Bond Optimix Global Emerging Markets
Shares - Entry Fee
MMF1183AU
Recommended
ING Investment Savings Bond Optimix Global Emerging Markets
Shares - Nil Entry Fee
MMF1184AU
Recommended
IOOF WealthBuilder Capital Guaranteed Fund
IOF0311AU
Recommended
IOOF WealthBuilder Fixed Interest Fund
IOF0008AU
Highly Recommended
IOOF WealthBuilder Australian Shares Fund
IOF0017AU
Highly Recommended
IOOF WealthBuilder Smaller Companies Fund
IOF0132AU
Highly Recommended
IOOF WealthBuilder Global Property Securities Fund
IOF0130AU
Investment Grade
IOOF WealthBuilder Australian Shares Fund – MulitiMix
IOF0133AU
Recommended
IOOF WealthBuilder International Shares Fund – MulitiMix
IOF0135AU
Recommended
Centuria Life Limited - Capital Guaranteed Bond
OVS0004AU
Investment Grade
Centuria Life Limited – Income Accumulation Bond
OVS0311AU
Investment Grade
Centuria Life Limited – Balanced Bond
OVS0011AU
Investment Grade
Centuria Life Limited – Growth Bond
OVS0006AU
Investment Grade
Centuria Life Limited – High Growth Bond
OVS0012AU
Investment Grade
Centuria Life Limited – Australian Shares Bond
OVS0010AU
Investment Grade
*Ratings are derived from the Lonsec rating of the relevant underlying managed fund and are subject
to change. Subscribers are encouraged to check underlying fund ratings on the Lonsec website.
Lonsec Limited ABN 56 061 751 102 • AFSL No. 246842 • Market participant of ASX Group and
Lonsec Research Pty Ltd ABN 11 151 658 561 who is a Corporate Authorised Representative of Lonsec Limited (together referred to as “Lonsec”)
This information must be read in conjunction with the Warning, Disclaimer, and Disclosure at the end of this document
7
Investment Bonds Update
Analyst Disclosure & Certification
Analyst remuneration is not linked to the rating outcome. The Analyst(s) may hold the products(s) referred to in this
document, but Lonsec considers such holdings not to be sufficiently material to compromise the rating or advice.
Analyst(s) holdings may change during the life of this document. The Analyst(s) certify that the views expressed in
this document accurately reflect their personal, professional opinion about the financial product(s) to which this
document refers.
Date Prepared: July 2012
Analyst: Deanne Fuller
Release Authorised by: Michael Elsworth
IMPORTANT NOTICE: This document is published by Lonsec Limited ABN 56 061 751 102 AFSL No.
246842 (Market participant of ASX Group) and by Lonsec Research Pty Ltd ABN 11 151 658 561 who is
a Corporate Authorised Representative of Lonsec Limited (together referred to as “Lonsec”). Please
read the following before making any investment decision about any financial product mentioned in this
document.
Warnings: Lonsec reserves the right to withdraw this document at any time and assumes no obligation
to update this document after the date of publication. Past performance is not a reliable indicator of
future performance. Any express or implied recommendation, rating, or advice presented in this
document is a “class service” (as defined in the Financial Advisers Act 2008 (NZ)) or limited to “general
advice” (as defined in the Corporations Act (C'wlth)) and based solely on consideration of data or the
investment merits of the financial product(s) alone, without taking into account the investment
objectives, financial situation and particular needs (”financial circumstances‟) of any particular person.
Warnings and Disclosure in relation to particular products: If our general advice relates to the
acquisition or possible acquisition of particular classes of assets or financial product(s), before making
any decision the reader should obtain and consider more information, including the Investment
Statement or Product Disclosure Statement and, where relevant, refer to Lonsec’s full research report
for each product, including the disclosure notice. The reader must also consider whether it is personally
appropriate in light of his or her financial circumstances or should seek further advice on its
appropriateness. It is not a “personalised service” (as defined in the Financial Advisers Act 2008 (NZ))
and does not constitute a recommendation to purchase, hold, redeem or sell any product(s), and the
reader should seek independent financial advice before investing in any product. Lonsec may receive a
fee from Fund Manager or Product Issuer (s) for reviewing and rating individual product(s), using
comprehensive and objective criteria. Lonsec may also receive fees from the Fund Manager or Product
Issuer (s) for subscribing to research content and services provided by Lonsec.
Disclaimer: This document is for the exclusive use of the person to whom it is provided by Lonsec and
must not be used or relied upon by any other person. No representation, warranty or undertaking is
given or made in relation to the accuracy or completeness of the information presented in this
document, which is drawn from public information not verified by Lonsec. Conclusions, ratings and
advice are reasonably held at the time of completion but subject to change without notice. Lonsec
assumes no obligation to update this document following publication. Except for any liability which
cannot be excluded, Lonsec, its directors, employees and agents disclaim all liability for any error or
inaccuracy in, or omission from, this document or any loss or damage suffered by the reader or any
other person as a consequence of relying upon it.
Lonsec Limited ABN 56 061 751 102 • AFSL No. 246842 • Market participant of ASX Group and
Lonsec Research Pty Ltd ABN 11 151 658 561 who is a Corporate Authorised Representative of Lonsec Limited (together referred to as “Lonsec”)
This information must be read in conjunction with the Warning, Disclaimer, and Disclosure at the end of this document
8