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 (sometimes called insurance bonds or tax-paid bonds) are a wrapper product that pays tax internally at 30% on earnings, so investors don’t include bond income in their annual tax return. For people on the top two marginal rates, that internal rate is the main attraction. The catch is the 10-year rule — hold the bond for a full 10 years and withdrawals are tax-free to you personally; break that window and some of the growth is assessable.

With three months left before 30 June 2026, EOFY is a natural checkpoint to review whether a bond still fits your structure, or whether starting one now locks in a 2026 purchase anniversary.

How the 10-year rule works

The clock starts on the initial investment date, not each contribution. You can top up each year by up to 125% of the previous year’s contribution without restarting the 10-year clock. Go above 125%, stop contributing for a full year, or fully withdraw and restart, and the 10-year period resets from the new start date.

What happens on withdrawal depends on when you pull out:

Withdrawal timing	What’s assessable
Year 1–8	100% of the growth component is assessable, with a 30% tax offset
Year 9	2/3 of the growth is assessable, with a 30% tax offset
Year 10	1/3 of the growth is assessable, with a 30% tax offset
After year 10	Nothing is assessable — fully tax-paid

The 30% tax offset reflects tax the bond provider has already paid internally. If your marginal rate is below 30%, the offset is not refundable, so bonds are rarely efficient for lower earners.

Worked example: $100,000 over 10 years

Assume a flat 6% annual return, no extra contributions after the first, and a holding period of exactly 10 years. The ending balance is approximately $179,085, with $79,085 of growth.

Scenario A — Investment bond, held to year 10: Balance of $179,085 withdrawn tax-free. No entry on the tax return.

Scenario B — Direct investing at 45% marginal rate + 2% Medicare levy (47% all-in): Assume all returns are taxed each year as income. Net return drops to about 3.18% after tax. Ending balance ≈ $136,800. That’s about $42,000 less than the bond over the full period.

Scenario C — Direct investing at 37% + 2% Medicare (39% all-in): Net return ≈ 3.66%. Ending balance ≈ $143,200 — roughly $35,800 behind the bond.

Scenario D — Direct investing at 30% + 2% Medicare (32% all-in): Net return ≈ 4.08%. Ending balance ≈ $149,600 — roughly $29,500 behind the bond, but this ignores franking credits and the CGT 50% discount on growth assets, which often narrows the gap for share-heavy portfolios.

Run your own numbers against your actual marginal rate and asset mix in the investment bond calculator.

Early withdrawal example

Same $100,000, same 6% return, but withdrawn at the end of year 7 when the balance is ~$150,363 and growth is ~$50,363.

• 100% of growth ($50,363) is assessable
• 30% offset applies: $50,363 × 30% = $15,109
• At a 47% marginal rate, tax on the growth = $50,363 × 47% = $23,671
• Net tax after offset = $23,671 − $15,109 = $8,562
• After-tax proceeds = $150,363 − $8,562 ≈ $141,800

Still workable, but the real saving comes from crossing the 10-year line.

Who bonds suit, and who they don’t

Bonds tend to fit:

• People with a sustained marginal rate of 37% or 45% who have maxed concessional super
• Savers accumulating money earmarked for a child’s education or a future home deposit
• Investors who want a “set and forget” structure that doesn’t generate annual tax admin

They tend not to fit:

• People whose marginal rate will be below 30% throughout the holding period — the internal 30% rate is worse than their personal rate
• Investors who value franking credits, which are consumed inside the bond
• People who might need the money back within 5 years — the tax drag on early withdrawal eats most of the benefit

EOFY checklist for investment bonds

• If you already hold a bond, confirm your 2025-26 contribution is within 125% of the 2024-25 contribution. Breaching the limit restarts the 10-year clock on the excess.
• If you’re considering starting a bond, an initial deposit dated before 30 June 2026 means the 10-year rule expires in the 2035-36 financial year rather than 2036-37.
• Review your beneficiary nomination — investment bonds pass outside the estate when a life-insured nomination is in place, which can simplify succession.
• Compare the bond’s internal fees to the expected tax saving. A bond charging 1.2% MER can erode the advantage versus a low-cost ETF held personally at 32% all-in.

Key takeaways

1. The 10-year rule makes bonds genuinely tax-free after year 10, but only the final third and two-thirds of growth escape tax in years 10 and 9 respectively.
2. The internal 30% tax rate only beats your personal rate if you’re on 37% or 45% marginal rates.
3. The 125% contribution rule is the single most common trap — breach it and the clock resets on the whole bond in some products.
4. EOFY is a useful checkpoint to review contribution headroom and decide whether to start a new bond this financial year.

For a quick view of the break-even between a bond and a direct portfolio at your marginal rate, use the investment bond calculator and cross-check your marginal rate in the income tax calculator.