Education Bond FAQs

An Education Bond is a tax effective investment product, specifically designed to help individuals and families save for education expenses, whether for yourself or a beneficiary. They have a special concession under the Australian Tax Law, called the Education Tax Benefit, which allows for a refund of the tax paid within the fund when withdrawals are made for education purposes.

Education bonds are also a fantastic estate planning tool. Direct beneficiary nomination bypasses a Will, ensuring funds are transferred directly to your chosen recipient for education or other purposes. This is particularly valuable in complex family situations or if you want to avoid the costly and time-consuming process of probate.

Additionally, if the life insured passes away, the bond can be paid out to the nominated beneficiary without incurring tax, even if the bond hasn’t reached the 10-year mark, making it an excellent strategy for intergenerational wealth transfer.

An individual(s) may open a Bond. They are known as the ‘Policy Owner’ (i.e. Investor or Joint Investors). The individual(s) must be aged 16 years or over. The Policy Owner may nominate a Life Insured* other than themselves. The Policy Owner may also nominate a beneficiary#.

A Company or a Trust may open a Bond. The Company or Trust invests under its legal name and must name a Life Insured on the policy.  Education Bonds are non-distributing therefore for some investors, using a Bond inside a Company or Trust may be an effective way to minimise income tax and capital gains tax.

*Life Insured – is the person(s) specified on the policy whose life is insured. When that person dies, the bond matures, and the benefit entitlements are paid to either the:

• Nominated beneficiary(s), or if none then:
• The policy owner, or if they have passed then:
• The policy owner’s estate.

#Nominated Beneficiary(s) – is the person(s) whom the investment proceeds will be distributed to when the policy matures:

• Can be a person, trust or charity
• Can have more than one (divided equally unless portions are advised)

Joint individual Policy Owners may only effect a nomination where they are both named as Life Insureds.

Yes, a child aged between 10 and under 16 years old is able to take out a policy in their name with parental or guardian consent. A child who is a policy owner is not allowed to make investment decisions, which includes switching, nominations or transfer of ownership without parental or guardian consent. A child will be the Life Insured listed on the policy. In the unfortunate event of a child passing away, the investment proceeds will be distributed tax-free to their estate.

Only Individual applicants may nominate a Policy Guardian on the Application Form. The Policy Guardian must be at least aged 18 years and shall act in the capacity of owner of the Policy in the event of the death or mental incapacity of the Policyholder (or last surviving Policyholder as the case may be) to continue the Policy.

Non individual Policyholders are unable to nominate Policy Guardians.

The role of Guardian only becomes active when a certain event occurs (e.g. policy holder death or mental incapacity).

Yes, the Policy Owner may nominate one or more beneficiaries to receive the investment proceeds from the policy in the unfortunate event of your death. The proceeds will be paid directly to your beneficiaries, tax-free, and not through your estate. This offers peace of mind by avoiding any unnecessary complications such as not having a will, waiting for probate or a will dispute.

You can change or cancel your nomination at any time.

Typically, if you are the sole Policy Owner and the named Life Insured, upon your death proceeds of your investment bond will be transferred to your nominated beneficiary(s), if selected, otherwise it will be passed onto your estate.

In the event of a joint ownership, upon the death of the first joint Policy Owner, the policy transfers to the surviving Joint Policy Owner and they become entitled to the full investment proceeds unless a beneficiary(s) has been nominated. The policy matures on the death of the last surviving Joint Policy Owner, or in the case of a different Life Insured upon the death of the Life Insured.

There may be good reason, usually involving wealth transfer and estate planning considerations. For example, grandparent(s) who invest into the Bond for their grandchild (grandchild becomes the Education Beneficiary) may not want the Bond to mature if/when they pass away, so as part of their estate and tax planning they list their adult daughter as the Life Insured to ensure the tax free proceeds of the Bond will pass directly to their adult daughter, thereby avoiding probate and estate processes and giving peace of mind.

Yes, an education beneficiary is required to allow for withdrawals for education expenses.

No, the education beneficiary can be any age. You may establish the Bond for a child who is not born yet.

The Policy Owner can transfer the bond to any individual, child (aged between 10 and 16), a company or trust. The Life Insured cannot change upon transfer of ownership.

There is no limit on your contribution to your policy in the first year, you can contribute whatever you wish in this first year as this will set your benchmark for the following years’ maximum contributions. Each subsequent year’s contributions can be up to a maximum of 125% of the previous year’s contributions in order to qualify for tax free withdrawals at maturity – this is also known as the 125% Contribution Rule.

The 10 Year Tax Rule means the income component of your withdrawals from the Fund are tax-free after 10 years so long as you meet the 125% Contribution Rule.  After meeting the 10 Year Tax Rule and the 125% Contribution Rule, when you make a withdrawal from the Fund, any income is not assessable income and therefore does not need to be declared on your personal income tax return.

Income in the Fund is taxed at the company tax rate (currently 30%) and paid for by Foresters Financial. As an investor, you do not need to declare any income received on your investment in your tax return or keep any capital gains record whilst you are invested in the Fund.

You can access your investment at any time. The tax applied depends on your reason for withdrawing.

Withdrawals from the ‘Capital Component’ for any purpose, are not treated as assessable income.

The table below is a summary of the tax implications of withdrawals, bearing in mind that if the bond owner (life insured) passes away, the bond can be paid out to the nominated beneficiary without incurring any tax, even if the bond hasn’t reached the 10-year mark.

*  Excepted income explained

Education Bonds do not attract CGT for the owner of the bond, or the Education Beneficiary.

So unlike other investment structures or direct investing, there is no CGT or CGT liability.

If you make withdrawals, transfer ownership or switch between investment options, there is no CGT event triggered or liability incurred.

In order to receive investment earnings tax-free after 10 years, you must meet the 125% Contribution Rule. This rule defines the contribution amounts you can make each year into your investment bond. In your first year of your policy, your contribution amount is uncapped. However, from the second year onwards, your contributions each year cannot exceed 125% of the previous year’s contributions.

There is no limit as to the amount you can invest in the first year of your policy; this will set your benchmark. Each following year you can make the same contribution you did the previous year plus an additional 25%, therefore totalling 125%.

If you contribute more than 125% of your previous year’s contributions, the start date of the 10 Year Tax Rule will be reset for tax purposes. This means that in order to withdraw your funds tax free, you will need to keep your investment for a further 10 years from this new start date. You can still withdraw your funds, but the income component or your withdrawal will be assessable income.  Similarly, if you stop contributing for a year, the next time you make a contribution a new 10-year period will commence from the date of that contribution for tax purposes. Setting up a regular savings plan is one way to avoid worrying about restarting your 10-year term to obtain the tax-free benefit.

You may continue to contribute where the term of the bond extends beyond 10 years, provided you continue to meet the 125% rule.

We will notify you before the end of your policy anniversary to remind you about your annual contributions and the 125% Contribution Rule.

You can access your money at any time. Withdrawals from the ‘Capital Component’ are not treated as assessable income.

If you withdraw from the ‘Earnings Component’, prior to completing the first 10 years, there is personal tax assessable for the amounts withdrawn. Tax offsets may apply.

After 10 years, withdrawals from the capital and earnings are tax free i.e. not reportable assessable income.

Education bonds are entitled to a unique concession. The 30% tax paid on investment earnings is recovered when withdrawals are used for education expenses. Or put another way, $30 for every $70 of withdrawn earnings.

For example, say an education bond balance is $100,000, comprising $50,000 capital and $50,000 earnings components and the student needs to withdraw to pay for their course fees of $10,000. The withdrawal will look like this:

Only $7,000 is required to be withdrawn from the account balance. The new balance becomes:

You can set up regular withdrawals to provide an ongoing income stream at any time – after meeting the 10 Year Tax Rule they will be tax free (subject to maintaining a minimum balance of $500); or

You can withdraw your policy balance in full or make a partial withdrawal at any time.

The Fund pays tax on investment earnings at the current company tax rate of 30%. The actual net tax rate may be lower depending on the underlying investments held in the Bond which may benefit from use of franking credits or other tax optimisation efforts.

Whilst invested in the Fund, investors do not need to record investment earnings on their personal income tax returns.

You can setup a regular savings plan from as little as $60 per month subject to the 125% Contribution Rule with no limit on contributions in the first year. We offer a broad range of contribution methods (direct debit, BPAY®), including our automatic 125% Savings Plan.

If you are new to the fund then you are entitled to request in writing the cancellation of the policy within thirty (30) days upon receipt of confirmation of your policy. If you are switching investment options then no cooling off period applies.

There are no switching fees. You can easily switch between all four (4) investment options to suit your personal circumstances. Please note that you will need to keep a minimum of $500 per investment option.

No, a ‘Scholarship Plan’ under the Income Tax Assessment Act 1997 prohibits use of the policy as security for borrowing or raising money.

No, neither the applicant or the education beneficiary need to provide a TFN.  The same applies for withdrawals – no TFN is required.

The bond owner can either nominate a new education beneficiary, continue to hold the bond, or withdraw all the money and close the bond.