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What is the 10-Year Tax Rule?

The 10-Year Tax Rule is a tax incentive policy that benefits Australian individuals and those planning to relocate to Australia. According to this rule, an investment held for ten years can be withdrawn tax-free, given that the following conditions are met:

• The investment must be held within a life insurance-wrapped platform.

• The annual contribution should not exceed 125% of the previous year’s contribution amount.

Tax Advantage:

When investment earnings are received by the insurance company, they are subject to tax at the current corporate tax of 30% before being reinvested. This makes insurance bonds a tax-effective long-term investment for individuals with a marginal tax rate higher than 30%. This becomes particularly advantageous for individuals residing outside Australia, as they can set up an investment bond in an offshore location with a 0% corporate capital gains tax.

If the life insurance policy is held for at least 10 years, the returns on the entire investment, including additional contributions, may become tax-free.

The tax treatment of investment bond earnings depends on the timing of withdrawals:

• Withdrawals made before 8 years are not eligible for tax-free benefits.

• During the 9th year, one-third of the withdrawal amount can be tax-free.

• During the 10th year, two-thirds of the withdrawal amount can be tax-free.

• After the 10th year, the entire withdrawal amount can be taken tax-free.

Investors can make additional contributions to the investment each year. Please note that during the 10-year period, the annual contributions should not exceed 125% of the previous year’s contributions, otherwise, the 10-year waiting period will be reset [Section 26AH (13)]. For example, if you contribute $10,000 in the first year, the contribution in the second year should not exceed $12,500, otherwise, the start date of the insurance policy will be reset. If no additional contributions are made in a particular year, any investments made in subsequent years will reset the 10-year waiting period.

Pros and Cons of Insurance Bonds:

Here are some benefits of life insurance-wrapped investments:

• They can potentially be a tax-effective long-term investment plan.

• Most offer a wide range of investment options to cater to different investment strategies and risk profiles.

• They can help save for a child’s future and be used as an estate planning tool.

• They may be useful for individuals who cannot contribute to superannuation.

Here are some risks of insurance bonds:

• Fees could be expensive, depending on the issuer and chosen investment options.

• Converting the balance to cash may be slower compared to other investments, and some bonds may require maintaining minimum balances.

• Loss of some tax benefits if funds are withdrawn before the 10-year period is reached.

Finally, the tax arrangement may not apply to all parties. Before making investment decisions, it is essential to consider the pros and cons of this tax arrangement and carefully evaluate various factors. 

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