Model the after-tax outcome of an Australian investment bond under ITAA 1936 s 26AH. Applies the 10-year rule, 125% contribution rule, 30% internal tax and offset, then compares against direct shares/ETFs and fully-taxed investing.
Sets the marginal-rate brackets and Medicare levy low-income threshold used to compare the bond against direct investment.
Sets the 10-year clock and the 125% contribution baseline
Must stay ≤ 125% of previous year's contribution to avoid resetting the clock
Year 11+ = tax-free (full 10 years elapsed)
Before any tax. Internal 30% bond tax is applied by the calculator.
Everything below is stacked on top of this income. Your current marginal rate is 32.0% incl. Medicare levy.
02 —RESULTS
Bond after-tax outcome (year 11)
Investment bond Winner
Gross proceeds$137,763.00
Capital (contributions)$100,000.00
Earnings component$37,763.00
Assessable fraction (year 11)0%
Assessable amount$0.00
Tax on assessable amount$0.00
Less: 30% non-refundable offset-$0.00
Personal tax payable$0.00
After-tax proceeds$137,763.00
Effective annual return2.96%
The assessable amount is added to your $120,000.00 of other income, so it is taxed at the brackets it actually reaches (incl. Medicare levy) — not a flat 32.0%.
Direct investment — fully taxed (e.g. interest)
Net final value$136,502.00
Effective annual return2.87%
Earnings taxed at your MTR each year (interest, unfranked distributions)
Direct investment — deferred, taxed as CGT
Gross final value$158,185.00
CGT at withdrawal$21,505.00
Net final value$136,679.00
Effective annual return2.88%
Shares/ETFs held > 12 months, realised at withdrawal. This horizon runs past 1 July 2027, so the gain is split: the pre-reform share keeps the 50% discount, the rest is indexed and taxed at no less than 30%.
Breakeven income (vs fully-taxed direct)
$44,401.00. Above this taxable income the bond beats a fully-taxed direct investment, because the earnings would be taxed at more than the bond's 30% internal rate (your own marginal rate at that income is 17.0%, but the investment's earnings stack on top of it).
Rule of thumb
bonds are most compelling when your MTR is > 30%. On this horizon the comparison has changed: the 50% CGT discount is abolished for disposals from 1 July 2027, and the post-reform slice of a gain is indexed then taxed at no less than 30% — so the direct arm no longer has a structural half-rate advantage, and a 30%-taxed bond is genuinely competitive over a long hold.
Recommendation
For your inputs, the investment bond gives the highest after-tax result.
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:
→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.
→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.
125% rule
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 2up to $12,500 (125% × $10,000)
Year 3up to $15,625 (125% × $12,500)
Year 4up 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
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
The bond's earnings stack on top of your OTHER taxable income, not against a flat marginal rate — so the real trigger is how much other income you have, not your bracket. Run the numbers on a policy held past the 10-year mark and the bond overtakes fully-taxed direct investing once other income passes roughly $44,000, a point where the investor's own bracket rate is still only about 17%. Surrender earlier and the answer inverts: withdraw in year 7, while the assessable fractions still bite, and the crossover jumps to roughly $131,000 of other income — so the holding period decides the question before your income does. It's the earnings compounding on top of that income that reach the bond's 30%, not the investor's headline rate.
Vs buy-and-hold shares/ETFs
Which one wins depends on the disposal date and, again, on other income rather than your bracket. Before 1 July 2027 the 50% CGT discount kept buy-and-hold ahead at every income level we modelled. From 1 July 2027 the reform's 30% minimum tax makes the bond genuinely competitive for higher-income, long-horizon holders — the crossover moves lower the longer you hold, landing above roughly $110,000-$120,000 of other income on a 10-to-11-year horizon. Below that, and across a wide middle band of other income, buy-and-hold still wins outright.
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.
FAQ
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, your time horizon and what you would have invested in otherwise. A bond earns 30% internal tax. For a disposal before 1 July 2027, a buy-and-hold share/ETF investment held more than 12 months gets the 50% CGT discount — an effective rate of MTR × 0.5, about 24% at a 47% rate — so direct investing usually beat a bond on that horizon. From 1 July 2027 the general discount is abolished: the post-reform part of a gain is indexed for inflation and taxed at no less than 30%, which removes the direct arm’s structural advantage and can flip the comparison to the bond over a long horizon. The calculator above applies whichever rules the disposal year actually falls under, so change the withdrawal year to see the switch.
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.
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 stack every taxable amount on the taxable income you enter, so your real brackets and Medicare levy apply rather than one flat rate; the selected year's brackets are used across the whole horizon (future bracket changes are not projected). They ignore franking credits on direct investments, and apply the CGT rules of the disposal year to the buy-and-hold comparison — the 50% discount before 1 July 2027, and cost base indexation plus the 30% minimum tax after it. This is general information, not personal tax advice.