Tax-free insurance bonds in Australia offer a significant advantage, but dig a little deeper before committing.
Many investment advisors based out of Australia have offered Australian expats investments through 10-year insurance bonds as a tax-free investment. This may seem advantageous, but you should investigate further before making a commitment.
New methods and systems offered to investors have made these products more attractive to many Australian expats. Check carefully, as under Australian Law, the Tax Office still has the right to tax proceeds if the commissioner considers the returns to be unreasonable in amount or in the operation of the policy.
Are you already tax free?
If you are in a country that does not tax expatriates on investment incomes such as Singapore, Hong Kong or Dubai, then investing in a policy may not be necessary as you already benefit from tax-free returns when investing normally.
Time requirements can be costly and inconvenient. If you don’t intend to use the funds on your return to Australia, then the policy would have tax merit, as the advantage of a few years tax-free in Australia would apply.
Will you need the funds on return?
For many, the primary objective of saving is to pay off their future home mortgage or buy a residence upon returning to Australia. If you cancel the policy when back in Australia prior to its full 10-year term, your profits will be subject to Australian tax, dependent on how long the policy has been in place.
It is highly recommended that any regular savings investment by Australian expatriates should have a term of investment no longer than the expected time before you return to Australia, leaving the funds available for you and your family to use.
Are there costs that come with the policy?
Any policy will come with upfront and deferred costs. That usually includes early surrender fees that requires consideration. As such, the cost of operating needs to be justified against the costs of alternatives, including a nil cost environment in your personal name. Plus, some of these policies have very high cancellation fees if cancelled within the 10-year period. Get written confirmation of any fees and payable commission for the person offering you the policy.
If you are content that the policy fits your needs, then it should be safe to proceed, but don’t be afraid to seek independent advice before committing, as it can save you lots of money and problems later.
Steve Douglas is the Co-Founder and Managing Director of Australasian Taxation Services (ATS). ATS provides specialist taxation services for anyone looking to invest in Australian property, including Australian expatriates living overseas. Areas of specialisation include the Australian taxation aspects of property investment, as well as expatriate and migration planning.
From The Finder (Issue 299), June 2019 / Updated by Jashleen Kaur, November 2020
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