Investing outside of Australia as an Expat: The tax treatment of offshore portfolio bonds

The New and Favorable Planning Opportunity for Aussie Expats

With the repeal of the FIF provisions, Aussie expats (both resident and non-residents), holding, or considering offshore investment linked insurance bonds for investment and longer term planning purposes has become a tremendously valuable financial planning tool for Australians and other nationalities moving to, or returning to Australia.

For the boring part, the redemption (cashing out) of such arrangements is treated under section 26AH of the Income Tax Assessment Act 1936. The 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)

The legislation is applicable to resident policyholders of foreign life policies and provides for the taxation of bonuses (investments gains & income), paid on termination or at the time of a partial withdrawal.

Tax on Full or Partial Surrender (Encashment)

If a policy has made an investment gain and is held for ten years or more, any gain made on surrender or maturity may be disregarded if the beneficiary

(i) is the original beneficial owner of the policy; or
(ii) acquired the interest in the policy for no consideration.

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 policyholders marginal rate

During the 9th year Two thirds of the gain is included as assessable income and taxed at the policyholders marginal rate
During the 10th year
One third of the gain is included as assessable income and taxed at the policyholders margin rate

After 10 years The whole gain does not have to be included as assessable income under Section 26AH


This is explained succinctly on the ATO website in the guidance notes for completing an income tax return.

One last point to mention is the way in which the plan is structured, in that the underlying investments must be diversified to ensure no more than 80% of the investments are in cash or cash equivalent investments under the Proposed Foreign Accumulation Fund Rules.

What all of this means fellow Expat Aussies is that those of you wishing to get serious about your investment and/or your longer term wealth/retirement planning, being an Aussie gives rise to a significant financial planning opportunity.

In case you missed it, its called tax exempt investing! .


Australian Taxation Office

Australian Parliament House


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