Few expats are aware that whilst living overseas, they can invest in structures that are already tax efficient, for a move (or return) to Australia.
Investment-linked life assurance policies, sometimes referred to as offshore bonds, or investment bonds, are investment tax-wrappers provided by a life insurance company.
Australian Tax Office legislation (Section 26AH) has meant gains held from eligible investment-linked life assurance policies, are free of tax where the policy has been held for over 10 years.
These products allow you to hold a range of investments, like mutual funds and ETFs inside of a life insurance based tax-wrapper.
Their unique tax treatment means in many countries the investments are not subject to tax on income, dividends, or capital gains within the policy.
This means you only pay taxes when withdrawing funds from your investment bond.
Any withdrawals will be split into an amount considered a return of your original capital (not-taxed), and the growth (potentially taxable depending on the holding period.).
How is my investment bond taxed if I return to Australia?
In Australia, only the growth in value of your investment is subject to tax, at the time of withdrawing funds from your investment bond.
The tax due depends on how long your policy has been held for:
| Years the policy is held | Effective Tax Rate (For Australian Residents) |
|---|---|
| Years 1-8 | 100% of the growth is taxable |
| Year 9 | 2/3 of the growth is taxable |
| Year 10 | 1/3 of the growth is taxable |
| Year 11 onwards | No tax |
The countdown from when your funds can be withdrawn free of tax starts when the policy is issued.
So this time could be built up entirely whilst living overseas. And the investment then remains tax efficient when returning to Australia.
Does topping up an investment bond after the policy has started affect this?
Under ATO rules you are allowed to continue contributing to your bond, provided deposits in one year doesn’t exceed your contribution in the previous year by more than 25%.
This means you can regularly save into your bond, but a large lump sum contribution could cause problems.
If a top up exceeds the previous year’s contribution by more than 25%, the 10 year period resets.
To mitigate the impact of this, for large deposits an additional investment bond could be set up.
Will I pay Australian taxes if I surrender my investment bond overseas?
By holding your investment bond in a tax-friendly third country, like the Isle of Man, it means no tax will deducted at source from your investment bond. This prevents you being subject to double taxation.
As any taxes due will simply come down to the local rules, in your country of residence at the time.
Can anybody open an investment bond?
They are best suited for people looking to invest for 10 years or more, who expect to move to Australia.
Most investment bond providers require an initial lump sum contribution of £45,000/USD 70,000.
The ongoing charges from investment bond providers often vary on the size of policy, so starting with a higher contribution can make them more cost effective.
Looking for help to tax-efficiently structure your investments?
Are you an expat with over £150,000 to invest? Arrange your complimentary initial consultation today.
