desreb Posted January 3, 2019 Share Posted January 3, 2019 I’m considering putting some UK funds into premium bonds. Since these return 1.4% for larger amounts and are backed by HMRC, they’re not a terrible place to store cash given the tiny lotto buzz of potentially winning £1m into the bargain. They’re also a great way for grandparents to contribute savings to the grandkids; well, shares or property are better, but currently they’re putting them in a current account, which is worse, and what UK grandparent doesn’t understand premium bonds?? However, if I’m Australian tax resident, who probably don’t recognise foreign tax agency concessions such as this, would any winnings be taxed? Looking at ATO, they say that prize winnings such as lottos are not taxed. This would seem to include Premium Bonds? D Quote Link to comment Share on other sites More sharing options...
Ken Posted January 3, 2019 Share Posted January 3, 2019 (edited) Premium bonds are not "ordinary lotteries". Winnings (which are really a return on your investment like interest and not really prizes despite being called that) are taxed in Australia. If you buy a lottery ticket you are gambling and should expect to lose your stake money. The ATO does not want to tax your gambling winnings as they'll be dwarfed by the amount you and everyone else will be claiming as losses. With premium bonds your stake is safe you're not gambling. Edited January 3, 2019 by Ken 1 Quote Link to comment Share on other sites More sharing options...
desreb Posted January 3, 2019 Author Share Posted January 3, 2019 Premium bonds are not "ordinary lotteries". Winnings (which are really a return on your investment like interest and not really prizes despite being called that) are taxed in Australia.I guess the difference is one has a net rate of return, while Lotto’s have a net rate of loss. It is still determined by chance, albeit with quite thin margins of probability. Has there ever been a finding or test case for this? Quote Link to comment Share on other sites More sharing options...
desreb Posted January 3, 2019 Author Share Posted January 3, 2019 The other question is still whether kids can hold them, and whether they would be taxed on them if within the usual kids’ account thresholds. Quote Link to comment Share on other sites More sharing options...
Ken Posted January 3, 2019 Share Posted January 3, 2019 5 minutes ago, desreb said: The other question is still whether kids can hold them, and whether they would be taxed on them if within the usual kids’ account thresholds. Kids can hold them but if their investment earnings are $420 per year or more then it's the parents who will be taxed on them. There would be no tax on a child's earnings under $420 per year. 1 Quote Link to comment Share on other sites More sharing options...
desreb Posted January 3, 2019 Author Share Posted January 3, 2019 Kids can hold them but if their investment earnings are $420 per year or more then it's the parents who will be taxed on them. There would be no tax on a child's earnings under $420 per year.I can only hope the grandparents contribute that much. It does make sense compared to their current investment. I assume we still need to declare the investments. Quote Link to comment Share on other sites More sharing options...
Ken Posted January 3, 2019 Share Posted January 3, 2019 20 minutes ago, desreb said: Has there ever been a finding or test case for this? There's been a ruling (1012884315351): https://www.ato.gov.au/law/view/document?src=hs&pit=99991231235958&arc=false&start=1&pageSize=10&total=6&num=5&docid=EV%2F1012884315351&dc=false&stype=find&tm=phrase-basic-premium bonds I don't think there's ever been a test case because there's no real basis to challenge it. 1 Quote Link to comment Share on other sites More sharing options...
Gbye grey sky Posted January 3, 2019 Share Posted January 3, 2019 As a direct consequence of Ken’s posts I have decided to dispose of my UK Premium Bonds (thanks Ken). I have only ever had £25 prizes and receive roughly 25 of them per year on average (or the equivalent of about 1.5% interest based on my stake). Currently my personal income makes me a non taxpayer in Oz though that will change soon when I draw my UK pensions so it makes sense to bring this money over to Oz now. Whilst a large win would be a great windfall I now know that a great deal of that win would go in tax. In effect Premium Bonds imply that you are staking your interest in exchange for ‘prizes’ but my own experience over several years shows a remarkably consistent return. Month by month the prizes vary but the overall return is almost always identical with the NS&I’s stated ROI. It doesn’t actually feel like I am gambling the interest which is presumably why the ATO view Premium Bond ‘winnings’ as earnings. Quote Link to comment Share on other sites More sharing options...
desreb Posted January 4, 2019 Author Share Posted January 4, 2019 Yes. MSE did a review where they said only a few people in the world can actually do the statistical analysis to determine what the average returns would be, due to the complexity of the maths. But I invested all my house sale proceeds in premium bonds while in the UK, and received just over the promised 1.4% because of an early 'good month' where I won a little more than average. I created a quick spreadsheet to track monthly winnings and compare them to the promised return, and was something like 0.2% ahead when I closed them. Given I was a higher rate taxpayer, the returns on the full amount with HMRC backing was better than any taxed saving account, and second only to an ISA with a promotional rate (which had total amount limits). Quote Link to comment Share on other sites More sharing options...
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