Super Tax Sparks Demand for Investment Bonds

Wealthy Australians are turning to investment bonds as a way to sidestep the financial hit from Labor's proposed $3 million superannuation tax, aiming to preserve returns while avoiding policy volatility - but the trade-off could be higher fees and lower tax efficiency for those on low incomes.

With the government planning to apply a higher tax rate to super balances above $3 million, investors are eyeing alternatives that provide stability and flexibility. Investment bonds, once overshadowed by superannuation - are regaining popularity because of their consistent rules and moderate tax advantages. These bonds act as containers for various assets, including shares and property investments and are being catapulted back into favour as confidence in superannuation wavers.

In fact, one major provider reported a 57% surge in money flowing into investment bonds following the super tax announcement, reflecting renewed interest. Investment bonds cap internal tax on earnings at 30% and in many cases, effective tax drops closer to 15%, thanks to strategies involving franking credits. Unlike super, these bonds offer full access to funds at any time and capital gains after ten years are tax-free, appealing to investors who value flexibility.

The shift may not suit everyone. Investment bonds often carry management fees around 60 basis points and are generally not recommended for people with marginal tax rates under 30%, who would be better off investing in their own name. Financial planners also caution that some tax advantages of bonds diminish over time compared to the long-term perks of super, particularly in retirement.

Even so, these instruments offer strategic estate planning benefits. They allow investors to bypass probate, designate beneficiaries who can’t be contested and structure conditions like delayed access or restricted use, useful tools when passing on wealth. As trillions are expected to transition between generations over the next decade, bonds offer a legally protected way to direct inheritance.

While super remains a favoured wealth-building tool due to unmatched tax perks, bonds appear to be a rising alternative. Their growing appeal reflects rising discomfort with frequent super reforms and points to a potential pivot in how Australians manage long-term financial planning.

Source: Australian Financial Review, Pitcher, Australian Super