As the cost of living has continued to rise, Allison and Josh have been exploring options to ensure their children will have the same educational opportunities that they enjoyed.
When their accountant mentioned Education Bonds, they were pleased to discover a tax-efficient avenue to save for education expenses while ensuring they would still have access to funds when needed. This was crucial for Josh and Allison, as it allowed them to prioritise their children’s education while maintaining financial flexibility for unexpected expenses.
One of the standout advantages of the Education Bond was the absence of setup costs, simplifying the application and investment process. This ease of entry allowed them to start saving straight away without any initial financial hurdles.
They were also reassured by the bond’s exclusion from estate planning. In the unfortunate event of their passing, the funds in the bond would seamlessly transition to their nominated beneficiary outside of probate proceedings, ensuring continuity in funding their children’s education.
"We see the Education Bond as an essential part of our commitment to provide a solid educational foundation for our children’s future success."
Setting up the bond was straightforward: Allison opened it with an initial lump sum, and now she and Josh contribute regular amounts by direct debit. The children’s grandparents also make one-off contributions as birthday gifts. (Alternatively, employers can deduct contributions directly from payroll, offering added convenience in savings management.)
The non-distributing nature of the bond is advantageous, as it simplifies tax reporting with no investment earnings to declare on their tax returns.
As their children progress through school, they look forward to utilising the bond funds, augmented by the additional 30% tax offset, to cover various education expenses such as uniforms, sports and music lessons, and other extra-curricular activities. This financial strategy not only secures their children’s educational needs but also optimises tax benefits for the whole family.
Incorporating an Education Bond into their financial plan has empowered Josh and Allison to save efficiently for their children’s education while leveraging tax advantages and maintaining financial flexibility. They view it as an essential part of their commitment to provide a solid educational foundation for their children’s future success.
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How it works
Here are two worked examples, using an individual who’s in a 30% marginal tax bracket and another in the 45% bracket.
Start with a $2,000 lump sum, then make ongoing weekly contributions of $38.46 (or $2,000 per year) for 11 years, then stop saving.
2 years later, start withdrawing from the bond to cover education expenses using tax free proceeds!
For example:
45% marginal tax rate
Education Bond Managed Fund Contributions: $22,000 $22,000 Investment Earnings*: $15,239 $21,726 Assessable Tax: $0 -$4,190 Capital Gains Tax Payable**: $0 -$2,768 Tax Credits on Redemption^: $6,500 $0 Total funds available for withdrawal: $43,739 $36,768 Investor is $6,971 better off using an Education Bond
30% marginal tax rate
Education Bond Managed Fund Contributions: $22,000 $22,000 Investment Earnings*: $15,239 $22,586 Assessable Tax: $0 -$2,904 Capital Gains Tax Payable**: $0 -$1,935 Tax Credits on Redemption^: $6,500 $0 Total funds available for withdrawal: $43,739 $39,747 Investor is $3,992 better off using an Education Bond
Assumptions:
*Same net return of 7% p.a (after fees) for the bond and the Managed Fund. Education Bond earnings are tax at 30% within the Fund, figures shown are post tax.
**No CGT is payable for the Education Bond. A Managed Fund is subject to 50% discounted capital gains which may reduce the tax payable
^Tax Credits are paid out to Bond holder at time of redemption.
A tax-effective way to pay for education expenses
An Education Bond allows you to save for a child’s education expenses in a tax-effective manner whilst still having access to your funds at any time.
The money you contribute into the bond can be invested into growth assets to grow your capital by compounding the income and gains.
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