Bonds may draw GST boost

From 1 July 2000, the tax situation of life companies is changing.

From that date, insurance companies will be taxed in broadly the same manner as other companies.

The life bond business will be subject to tax at 34 per cent rather than the current 39 per cent and, from 1 July 2001, that rate will drop to 30 per cent.

The rationale in reducing the rates to these levels is to ensure that all companies are treated on exactly the same basis.

However, this has implications for investors who have bought bonds in these companies over the many years.

The tax treatment of bonuses payable on life insurance bonds taken out before 1 July 2001 is not affected as the existing rules will continue to apply.

Provided that the policy has been held for ten years or more, the reversionary bonuses will be treated as a tax-free bonus.

At any time prior to the eighth year, the full amount of the bonus must be returned as assessable income and tax assessed.

A rebate of 39 per cent of the bonus is applied to reduce the amount of taxation that will apply on the bonus declared as assessable income.

In the ninth year, the bonus to be declared is two-thirds of the bonus achieved. Tax is assessed and a rebate applied to the tax payable.

In the tenth year, the bonus to be assessed is only one-third of the bonus achieved. As before, the rebate will be applied and will reduce the tax payable.

From 1 July 2001, investors investing in insurance bonds will be treated the same way as investors and members of companies and other widely held trusts.

In broad terms, the income and gains made on the bonds will be taxed in the hands of the life company at the tax rate that would apply.

The policyholder will then receive an imputation credit for the tax paid by the company.

What the life company does with the bonus is their choice. They may reinvest the bonuses or actually pay it out to the investors.

The upshot of this is to leave investors in the position whereby it would be expected that returns generated by life companies would increase.

Given that their tax rates will have dropped markedly from 39 per cent to 34 per cent, they should generate a greater after tax return.

The additional imputation credit that will apply may be of benefit to the investor to apply against the tax on other income that they may have.

In essence, the life insurance bond and friendly society bond business that has been languishing for such a long time may surface as a viable option for the future.

As the changes are bedded down and we see the implications filter through to the marketplace, it seems that we need to reconsider these investment alternatives as another option for retirement planning.

They may not be suitable for everyone but it does require consideration of another option for the future.

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