Investment Bonds and the 10-Year Rule Explained (2025-26)

General information only. This is not tax or financial advice. Consult a registered tax agent or licensed adviser before making investment decisions.

Investment bonds (also called insurance bonds or tax-paid bonds) are a wrapper product issued by a life insurance company or friendly society. The issuer pays tax on the earnings inside the bond at 30% — the ordinary-class rate for life insurance companies — so you never report bond income on your own return. The catch is the 10-year rule: hold the policy through the full 10-year eligible period and later withdrawals are tax-free to you personally; take money out inside that period and part of the growth is assessable to you.

Almost every explainer you will read compares that 30% internal rate to your marginal rate and concludes that bonds suit people on 37% or 45%. That test is now wrong twice over.

• The competitor changed. What used to beat a bond for everybody was a plain buy-and-hold share or ETF portfolio, because the 50% CGT discount taxed its growth at half your marginal rate — about 23.5% at the top bracket, comfortably under the bond’s 30%. From 1 July 2027 the discount is abolished for individuals, trusts and partnerships and replaced with cost base indexation plus a 30% minimum tax on the part of the gain that accrues after that date. The direct portfolio’s structural half-rate advantage is gone.
• “Your marginal rate” is the wrong input. A bond’s earnings are not taxed at the bracket your salary sits in. They land on top of your other income, so what matters is your other taxable income, not the rate you think of as yours. The crossover sits far lower than the usual advice implies.

The tables below are generated by the same engine that powers the investment bond calculator, which stacks every arm’s taxable amount on the income you enter rather than applying one flat rate.

How the 10-year rule works

Section 26AH of the ITAA 1936 defines an eligible period of 10 years running from the date of commencement of risk on the policy — the initial investment date, not each contribution. You can top up each year by up to 125% of the previous year’s premiums without disturbing that clock. Pay in more than 25% above the previous year and the eligible period is re-reckoned from the start of that year (s 26AH(13)); stop contributing for a full year, or fully withdraw and restart, and the clock likewise runs from the new start date.

What happens on withdrawal depends on when you pull out:

Note the boundary carefully: a withdrawal made during the tenth year still carries a third of the growth into your assessable income. Only once the full 10 years have elapsed is the withdrawal free of personal tax. “Held to year 10” and “held past year 10” are different answers.

The 30% offset in s 160AAB is a rebate, not a refund. It can reduce the tax on the assessable amount to nil, but never below nil, so a low earner cannot convert it into cash. That is a smaller problem than it sounds — as the numbers below show, a lower earner’s real cost is not the withdrawal at all. It is the 30% the issuer removes from every year’s earnings on the way there, regardless of what rate that earner would have paid themselves.

What the CGT reform changed, and why it inverts the usual advice

Before the reform, the honest answer to “bond or shares?” was shares, at every income. A buy-and-hold portfolio deferred its tax to a single realisation and then halved the gain. Running the comparison on the pre-reform rules, a $100,000 lump at 6% never produced a bond win against buy-and-hold at any level of other income up to $1 million, on any holding period.

Post-reform, a win region appears — and it moves toward the bond the longer you hold, because a larger share of the gain falls after 1 July 2027 and meets the 30% minimum tax:

The reform did not make bonds cheaper. It made the alternative dearer, and that is enough to change the answer for a long-horizon investor with high other income. For details of the new regime, see what the final law says and the cost base indexation explainer.

Worked example: $100,000 over 10 years

Assume a $100,000 lump sum, a flat 6% gross annual return, no further contributions, and 2025-26 rates and brackets applied across the horizon.

Inside the bond, the issuer’s 30% takes the compounding rate from 6% to 4.2%, so the balance at the end of year 10 is $150,896, of which $50,896 is growth. A withdrawal in the tenth year makes a third of that growth — $16,965 — assessable, against a $5,090 offset.

Three arms, by the investor’s other taxable income:

Two crossovers are doing all the work here:

• Against fully-taxed income (bank interest, unfranked distributions), the bond breaks even at roughly $44,000 of other income — not at a 30%, 37% or 45% marginal rate. At $44,000 the investor’s own bracket rate is 18% (16% plus the Medicare levy). It is the investment’s earnings, stacking on top of that income, that climb into the 30% band, which is why the sensible input is your income rather than your rate.
• Against buy-and-hold, the bond only wins above about $133,000 of other income on this horizon. Waiting one more year moves that to about $120,000 (see below).

Both crossovers shift a little with the year you select — on 2026-27 brackets the buy-and-hold crossover falls to about $116,000, because the second bracket drops from 16c to 15c. Run your own figures in the investment bond calculator.

One more year is worth more than it looks

Holding the same bond into year 11 ends the eligible period. The balance is $157,233 and nothing at all is assessable, at any income — the row is flat across the whole rate scale. That single extra year both adds a year of compounding and removes the last third of the assessable growth, which is why it beats buy-and-hold from about $120,000 of other income rather than $133,000.

Withdrawing early: year 7

Same $100,000 and same 6%, but surrendered at the end of year 7. The bond is worth $133,375, of which $33,375 is growth — and inside the eligible period, 100% of it is assessable.

At $200,000 of other income the growth attracts $15,686 of tax stacked on that income, against a $10,012 offset, so $5,674 is payable and $127,701 comes back.

Buy-and-hold wins in every row. On a seven-year horizon the reform does not rescue the bond at any income, because too little of the gain has been dragged behind the 30% internal rate for long enough to matter, and the offset largely neutralises the withdrawal tax anyway. If there is a real chance you will need the money before the 10 years are up, the bond is the wrong wrapper — not because the exit is punitive, but because the entry cost was never recovered.

Who bonds suit, and who they don’t

State the test in income, not in marginal rates.

Bonds tend to fit:

• Investors with other taxable income above roughly $120,000–$135,000 who will genuinely leave the money alone past the 10-year mark, and who would otherwise have held a growth portfolio
• Anyone whose alternative is fully-taxed income — interest, unfranked distributions — from about $44,000 of other income upward
• Savers accumulating money earmarked for a child’s education or a future home deposit, where the tax-free maturity lines up with a known date
• Investors who want a set-and-forget structure with no annual tax admin, and who value the estate-planning mechanics (a life-insured nomination passes the proceeds outside the estate)

They tend not to fit:

• Investors on modest other income. Below roughly $44,000 a fully-taxed direct portfolio beats the bond outright, and the non-refundable offset cannot give back the 30% already taken inside the wrapper each year.
• Investors on middling income — say $45,000 to $115,000 — whose alternative is a growth portfolio. Buy-and-hold still wins there, even after the reform.
• Anyone who might need the money back inside the 10-year eligible period.
• Investors who value franking credits, which are consumed inside the bond.

Checklist before you commit

• If you already hold a bond, confirm this year’s contribution is within 125% of last year’s. Paying more than 25% above the previous assurance year re-reckons the eligible period from the start of that year.
• Check the withdrawal year you actually intend, not a round number. Year 10 and year 11 are taxed differently, and the difference is larger than most fee comparisons.
• Compare the issuer’s fees against the tax gap, not against zero. On the year-10 numbers above, the bond’s edge at $200,000 of other income is roughly $3,200 over a buy-and-hold portfolio — a 1.2% MER on a six-figure balance erases that several times over. The tax case and the fee case have to be won together.
• Review your beneficiary nomination — investment bonds pass outside the estate when a life-insured nomination is in place, which can simplify succession.
• If the alternative you are actually giving up is a share portfolio, model the disposal year explicitly. A sale before 1 July 2027 still gets the 50% discount; one after it does not.

Key takeaways

1. A withdrawal in the tenth year still brings a third of the growth into your assessable income. Only after the 10-year eligible period ends is a withdrawal free of personal tax.
2. The old rule of thumb — “bonds win above a 37% or 45% marginal rate” — does not survive the arithmetic. The comparison runs on your other income, because the bond’s earnings stack on top of it, and the crossover against fully-taxed income sits near $44,000 of other income, where the investor’s own bracket rate is 18%.
3. The 2027 CGT reform inverted the buy-and-hold comparison. Under the 50% discount a buy-and-hold portfolio beat the bond at every income; from 1 July 2027 the bond wins above roughly $120,000–$133,000 of other income on a 10-year-plus horizon, and the threshold falls the longer you hold.
4. On a seven-year horizon buy-and-hold still wins at every income. The bond’s case is made by duration, not by your tax bracket.
5. The 125% contribution rule is the most common trap — pay more than 25% above the prior year’s premiums and the eligible period restarts from that year.

Model the crossover for your own income, contribution pattern and withdrawal year in the investment bond calculator, check your marginal rate in the income tax calculator, and test the disposal-year effect on the direct alternative in the CGT discount reform calculator.