Investment Bond Tax Calculator (Australia)

Model the after-tax outcome of an Australian investment bond (also called an insurance bond) under ITAA 1936 s 26AH. The calculator applies the 10-year rule, the 125% contribution rule, 30% internal bond tax and the 30% non-refundable offset, then compares your bond outcome against (a) a fully-taxed direct investment and (b) buy-and-hold shares/ETFs with the 50% CGT discount.

How an investment bond is taxed

An investment bond is a life-insurance-style wrapper. You hand money to the issuer; the issuer invests it and pays company tax (30%) on the earnings each year. You pay no personal tax while the money stays inside. When you withdraw, the tax treatment depends on how long you've held the bond:

  • Withdrawn in years 1–8 — the earnings component of the withdrawal is added to your assessable income in full. You pay tax at your marginal rate, then subtract a 30% non-refundable offset (the tax already paid by the issuer).
  • Year 9 — only two-thirds of the earnings component is assessable.
  • Year 10 — only one-third of the earnings component is assessable.
  • After year 10 — zero of the earnings component is assessable. The full withdrawal is tax-free.

The 30% offset is not refundable, which means if your MTR is 30% or below, you effectively pay no personal tax even on early withdrawals. But in that scenario, you also usually don't benefit much versus direct investing.

The 125% contribution rule

The 10-year clock starts on the date of your first contribution. Subsequent contributions can be added without restarting the clock, but only up to 125% of the previous year's contribution. For example:

  • Year 1: $10,000
  • Year 2: up to $12,500 (125% × $10,000)
  • Year 3: up to $15,625 (125% × $12,500)
  • Year 4: up to $19,531

If you contribute more than 125%, the excess amount is treated as starting a new 10-year period. If you skip a year entirely (contribute $0), any subsequent contribution restarts the clock for that amount. Constant or steady-growth contributors have no issue; lumpy contributors need to be careful.

Bond vs direct investing — when does the bond actually win?

The headline case for bonds ("tax-free after 10 years") is often oversold. The right comparison is against the alternative you would have invested in:

  • Vs bank interest / fully-taxed income — bonds win once your MTR exceeds ~30%, because the bond's 30% internal rate beats your marginal rate every year the money compounds.
  • Vs buy-and-hold shares/ETFs (CGT discount applies) — bonds rarely win. The 50% CGT discount gives an effective rate of MTR × 0.5 — about 24% at the top bracket — which is already lower than the bond's 30%. Tax deferral then widens the gap.

Where bonds genuinely earn their keep is in simplicity, estate planning and specific use cases: tax-free transfer to a child at age of majority, tax-free death benefit to a beneficiary, no annual return complexity, and a formal 30% tax rate regardless of the investor's personal bracket (useful for trusts and some minors).

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Frequently asked questions

What is an Australian investment bond (insurance bond)?
An investment bond (also called an insurance bond) is a long-term investment wrapper issued by a life insurance or friendly-society entity. Earnings inside the bond are taxed at the company tax rate of 30% by the issuer — you don't receive annual distributions, so you don't pay personal tax on the earnings each year. Under section 26AH of ITAA 1936, withdrawals become personally tax-free once the policy has been held for more than 10 full years.
What is the 10-year rule?
The s 26AH assessable fraction depends on when you withdraw: Years 1–8 → 100% of earnings assessable. Year 9 → 2/3 assessable. Year 10 → 1/3 assessable. After year 10 → 0% (tax-free). A non-refundable 30% tax offset is available on the assessable amount, reflecting the tax the bond issuer has already paid. If your marginal rate is 30% or less, the offset fully extinguishes any personal tax even on an early withdrawal.
What is the 125% rule and why does it matter?
Each year, you can contribute up to 125% of the previous year's contributions without restarting the 10-year clock. If you contribute more than 125%, the excess starts a new 10-year period for that portion. Skipping a year (contributing $0) also resets the clock for any later contribution. The 125% rule is what makes bonds work for disciplined, growing contributions — but it punishes lumpy, irregular top-ups.
Are investment bonds better than shares/ETFs?
It depends on your marginal tax rate and what you would have invested in otherwise. A bond earns 30% internal tax; a buy-and-hold share/ETF investment held > 12 months gets the 50% CGT discount, giving an effective rate of MTR × 0.5 (e.g. 24% for someone on a 47% rate). This means direct investing usually beats a bond for long-term share/ETF strategies — even at the top tax bracket. Bonds start to win when compared to fully-taxed alternatives like bank interest or unfranked income, or when the investor has a very high MTR and needs to control estate distribution.
Can I withdraw just part of the bond?
Yes. Partial withdrawals apply the same s 26AH assessable-fraction rule to the proportionate earnings component of the amount withdrawn. The bond itself continues and the original start date for the 10-year rule is preserved (assuming the 125% rule hasn't been breached).
Who should consider an investment bond?
Typical beneficiaries are: (1) high-income earners (MTR above 30–39%) looking for a simple, set-and-forget wrapper, (2) parents/grandparents saving for a child's education with a specific time horizon (the bond can be transferred to the child at age of majority with no CGT), (3) people whose estate would otherwise attract heavy death-benefits tax if held in super, and (4) investors wanting to avoid yearly tax-return complexity. Bonds are not ideal for pure wealth maximisation vs a disciplined share portfolio — the non-tax benefits (simplicity, estate planning, creditor protection) do most of the work.
Does Medicare levy apply to bond earnings?
Yes — the 2% Medicare levy applies to any assessable portion of earnings included in your personal return (i.e. withdrawals before the 10-year mark). After year 10, there's no assessable amount, so no Medicare levy either. The calculator includes Medicare in your effective MTR automatically.
What if I die before the 10-year mark?
If proceeds are paid to a beneficiary on the death of the life insured, the amount is tax-free regardless of how long the bond has been held. This is a key reason bonds are popular in estate planning. Assignments (transfers) before death are a separate matter and the 10-year clock generally carries over to the new owner.

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Tax Accuracy & Sources

Reviewed: March 2026 · Tax year: 2025-26

Calculations apply ITAA 1936 s 26AH as published by the ATO. The 30% internal tax rate reflects the current company tax rate; bond issuers can vary slightly. Comparisons against direct investing assume a flat marginal tax rate across the period, ignore franking credits on direct investments, and use the 50% CGT discount for the buy-and-hold comparison. This is general information, not personal tax advice.

Last updated 16 April 2026 Tax year 2025-26

Data sources: ATO (ato.gov.au), Services Australia

This tool is general information only, not financial advice.

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