The tax advantages of Australian tax residents holding an offshore bond
While abroad, non-resident Australians holding a Guernsey based offshore bond will benefit from ‘gross-roll up’ (investments generally growing virtually free of tax throughout the time the offshore bond is held subject only to a potential withholding tax deducted at source in certain jurisdictions) and will also benefit from the fact that no Australian Income Tax liability will arise on full surrender of individual policies or partial surrender across individual policies within a plan.
After moving to Australia, despite the fact that Australian tax residents are subject to tax on their worldwide income including the gains abroad, if they hold an offshore bond for more than 10 years (this period includes the time that the planholder was a non-Australian resident) then they have no Income Tax liability on partial/full surrenders occurring in insurance year 11 and thereafter.
Further, they may increase the premium every insurance year by up to 25% without incurring any Income Tax liability.
Example: An individual takes out an offshore bond on 01/10/2003 with an annual premium of $12,000. Assume approximately 7% growth and that immediately before the end of the 8th year the surrender value of the plan is $112,000.
Also, the planholder intends to take 3 partial surrenders each of $15,000 immediately before the end of the 8th, 9th and 10th insurance years. There have been no previous withdrawals.
Rule of thumb
As a rule of thumb, if a plan (or individual policy) has made a chargeable gain and is held for more than 10 years, any gain made on partial/full surrender thereafter will be disregarded for Income Tax purposes if the beneficiary is the original beneficial owner of the plan (or individual policy) or he/she acquired the interest by way of gift.
This rule of thumb is subject to the condition that the total premiums paid in any insurance year of the plan life do not exceed by more than 25% the total premiums paid in the immediately preceding insurance year.