With the rising cost of education and inflation, more parents and grandparents are turning to education bonds as a tax-effective way to plan for school fees, university costs, and vocational training. But what exactly are education bonds, and how do they work? Financial adviser Jovan Cvetkoski explains everything you need to know.
What is an education bond?
An education bond is a long-term investment vehicle designed to help families save for education-related expenses. These bonds can be used for:
- Primary & secondary school fees
- University tuition & accommodation
- TAFE & vocational training
- Extracurricular activities like sports or music
Education bonds work by pooling funds from multiple investors and investing them in shares, property, bonds, and cash. They have both:
- A capital component (the money you contribute)
- An earnings component (the investment returns generated over time)
The 10-Year Advantage: How tax benefits work
One of the key benefits of investing in education bonds is their tax efficiency. The bond provider pays tax on earnings within the fund, meaning you don’t need to declare it on your tax return.
Tax rules for education bonds:
- Within 8 years: You will pay tax on all bond earnings at your personal tax rate, minus a 30% tax offset.
- Year 9: You pay tax on two-thirds of the earnings at your tax rate, minus the 30% offset.
- Year 10: You pay tax on one-third of the earnings at your tax rate, minus the 30% offset.
- After 10 years: All bond earnings are tax-free.
The 125% Rule: Important contribution limits
To maintain the 10-year tax-free advantage, investors can contribute up to 125% of their previous year’s contribution. If this limit is exceeded, the 10-year period resets, delaying full tax-free access to earnings.
Key benefits of education bonds
1. Tax efficiency
Since the bond provider pays tax on investment earnings, high-income earners benefit from reduced personal tax liability.
2. Asset protection
Education bonds are often protected from creditors, making them a secure investment option.
3. Estate planning advantages
Unlike traditional investments, education bonds can bypass probate, allowing tax-free distribution to beneficiaries. This makes them a valuable estate planning tool.
4. Capital access flexibility
While the most tax-efficient use is for education, some education bonds allow access to funds for other purposes if needed.
5. Grandparent-friendly investment
Education bonds provide a structured way for grandparents to assist with education costs, knowing funds will be used for their intended purpose.
How to invest in an education bond
Education bonds are typically available only through a financial adviser.
Costs and fees
- Administration fees: Usually around 0.70% per year.
- Investment fees: Depending on the chosen investment option, fees can be as high as 1%.
While education bonds aren’t the cheapest investment option, their tax efficiency and long-term benefits make them worth considering.
Is an education bond right for you?
If you’re considering investing in education bonds, Jovan Cvetkoski can provide expert financial advice tailored to your family’s education savings goals.
Contact Knight today to explore how education bonds can fit into your financial plan.
Frequently Asked Questions
1. What is an education bond and how does it work?
An education bond is a long-term investment designed to help families save for education-related expenses. Funds are invested in shares, property, bonds, and cash, with tax benefits available after 10 years. The money can be used for school fees, university tuition, vocational training, and more.
2. What are the tax benefits of investing in education bonds?
Education bonds offer significant tax advantages. Earnings are taxed within the fund at a lower corporate rate, and after 10 years, all earnings can be withdrawn tax-free. Investors can also benefit from a 30% tax offset on early withdrawals, making them attractive for high-income earners.
3. Can education bonds be used for non-education expenses?
Yes, while education bonds are designed for school and university costs, some allow capital withdrawals for other purposes. However, to maximise tax benefits, it’s best to use them for education-related expenses. Jovan Cvetkoski can provide personalised financial advice on structuring your investment.
