Investing Outside of Australia as an Expat: The Tax Treatment of Offshore Portfolio Bonds
The Favorable Planning Opportunity for Aussie Expats
Holding or considering offshore investment linked insurance bonds for investment and longer-term planning purposes has become a tremendously valuable financial planning tool for resident and non-resident Australians and other nationalities moving to, or returning to Australia.
The redemption (cashing out) of such arrangements is treated under section 26AH of the Income Tax Assessment Act 1936. This section provides for taxing of amounts paid as or by way of bonuses under life assurance policies taken out after 27th August 1982, and which are not subject to tax under any other provision of the income tax law.
Taxation of Foreign Life Policy Proceeds (Individual Policyholders)
As an Australian tax resident, you will be assessed for income tax on the chargeable gains arising from life assurance policies in accordance with the income tax legislation. These gains are known as bonuses and only become taxable when you actually receive them and not while they are accumulating in the policy.
Tax on Full or Partial Surrender (Encashment)
There may come a time when you want to start using your investment to supplement other sources of income such as your pension, or for capital expenditure such as buying a property. You will be able to set up a regular “income” withdrawal or take ad hoc payments or fully surrender the plan if it is no longer required.
If you hold your policy for more than ten complete policy years from commencement, you will not be taxed on the bonus because, after this time, it is no longer included as part of your assessable income.
The holding period, that is, the period the investment is held includes a time when the policy holder was an Australian tax resident and/or when the policyholder was a non-Australian resident. After returning to Australia, the policyholder will be assessed for income tax on chargeable bonuses (cash outs) arising during the eligible period as follows:
- Within 8 years—The full gain is included as assessable income and taxed at the policyholder’s marginal rate
- During the 9th year—Two thirds of the gain is included as assessable income and taxed at the policyholder’s marginal rate
- During the 10th year—One third of the gain is included as assessable income and taxed at the policyholder’s margin rate
- After 10 years—The whole gain does not have to be included as assessable income under Section 26AH
This is explained on the Australian Taxation Office (ATO) website in the guidance notes for completing an income tax return.
Australian Taxation Office
Australian Parliament House