Investment Bonds Australia: The 10-Year Rule Explained (2026)

Quick answer: An investment bond (also called an insurance bond) is a tax-paid investment run by a life insurance company or friendly society. Earnings are taxed inside the bond at up to 30%, and you don't put them in your tax return. If you hold the bond for 10 years, withdrawals are tax-free in your hands. Withdraw earlier and some or all of the growth is added to your taxable income, with a 30% tax offset. Each year you can add up to 125% of the previous year's contribution; go over that and the 10-year clock restarts. They mainly suit people on high marginal tax rates investing for 10+ years, or saving for children.

How an investment bond works

Moneysmart describes an investment bond as a long-term investment offered by insurance companies and friendly societies: your money is pooled and invested in the option you choose, such as shares, a diversified mix or cash.

The key difference from owning shares or ETFs directly is who pays the tax. The bond provider pays tax on the investment earnings inside the bond, at up to 30%. You don't receive distributions, and there's nothing to include in your tax return each year while it grows.

That's attractive if your own marginal rate is higher than 30%: someone on 37% or 45% pays less tax on the earnings than they would holding the same investments personally. It's unattractive if your marginal rate is below 30%. You'd pay more tax inside the bond than you would on the earnings yourself.

The 10-year rule

Under section 26AH of the Income Tax Assessment Act 1936, the growth (the "bonus") you withdraw is treated differently depending on when you take it:

When you withdraw	How much of the growth is added to your taxable income
Years 1–8	All of it
Year 9	Two-thirds
Year 10	One-third
After 10 years	None: tax-free

When growth is added to your income under these rules, you get a 30% tax offset on it, recognising that tax has already been paid inside the bond. In effect, you only pay the difference between your marginal rate and 30%.

Example: you withdraw $20,000 of growth in year 5 and your marginal rate is 37%. The $20,000 is added to your income: $7,400 of tax, less a $6,000 offset (30%), leaves $1,400 extra to pay, before Medicare levy. On a 45% marginal rate, the extra would be $3,000. On a 30% marginal rate, the offset roughly covers it.

Exceptions. The ATO's ruling confirms withdrawals aren't caught by the rule if they result from the death, accident, illness or disability of the person whose life the policy covers. Nor are they caught if the bond is surrendered because of the holder's serious financial difficulties, unless it was set up with the intention of cashing it in early.

The 125% rule

You can keep adding money without restarting the 10-year clock, as long as each year's contribution is no more than 125% of the previous year's. If a year's contribution exceeds that, the policy is treated as starting again from the start of that year, and the full 10 years runs from then.

Year	Contribution	Allowed under 125%?
1	$10,000	Initial investment
2	$12,500	Yes (exactly 125%)
3	$15,625	Yes
4	$25,000	No, the 10-year period restarts

Skipping a year matters too. If you contribute nothing in one year, the 125% limit for the next year is based on that zero, so any later contribution restarts the clock.

Investment bond vs ETFs vs super

	Investment bond	ETFs in your name	Super
Tax on earnings	Up to 30%, paid inside the bond	Your marginal rate (0–45% plus Medicare levy)	15% (accumulation)
Tax when you withdraw	Nil after 10 years	Capital gains tax on growth	Generally nil after 60
Access	Any time, with tax consequences before 10 years	Any time	Preservation age (60)
Contribution limits	125% rule	None	Annual caps
Fees	Usually higher than a broad ETF	Low (e.g. 0.04–0.20% for broad ETFs)	Varies by fund

For most people, super is the most tax-effective place for long-term money, but it's locked away until 60. ETFs are cheapest and most flexible, but earnings are taxed at your marginal rate. Investment bonds sit between them: tax-effective for higher earners, accessible before 60, but only fully tax-free after 10 years. See ETFs inside vs outside super for the super comparison in more detail.

Who investment bonds suit

Higher-income earners (37% and 45% brackets) who've maxed out their super contributions and want another tax-effective bucket they can reach before 60.
Parents and grandparents saving for children. Unearned income in a child's name is taxed at high penalty rates, while a bond pays its own tax. We compare this with Vanguard Kids and Pearler Kids in investing for children.
Estate planning. Many providers let you nominate a beneficiary for the bond, which can affect how it's handled when you die. Check the provider's terms and get legal advice on how this fits your estate plan.

They usually don't suit people on marginal rates below 30%, money you might need within 10 years, or anyone who can't keep within the 125% rule.

Use the Income Tax Calculator to check your marginal rate, and the Superannuation Calculator to compare with extra super contributions.

Frequently asked questions

What is the 10-year rule for investment bonds?

If you hold an investment bond for 10 years, withdrawals are tax-free in your hands. Growth withdrawn in years 1–8 is fully added to your taxable income, two-thirds in year 9 and one-third in year 10, each with a 30% tax offset for tax already paid inside the bond.

What is the 125% rule?

Each year you can contribute up to 125% of what you contributed the previous year without restarting the 10-year period. If you exceed that, the bond is treated as starting again from that year.

Can I withdraw from an investment bond before 10 years?

Yes, at any time. The growth you withdraw is added to your taxable income (fully in years 1–8, partly in years 9–10), but you receive a 30% tax offset, so you only pay the difference between your marginal rate and 30%.

Are investment bonds worth it?

Mainly for people on marginal tax rates above 30% who can leave the money invested for 10 years, or for saving for children. For lower-income earners, the 30% tax inside the bond can be higher than the tax they'd pay holding investments themselves, and fees are usually higher than broad ETFs.

Do I declare investment bond earnings in my tax return?

Not while the bond is growing: the provider pays the tax. You only include growth in your return if you withdraw it within the first 10 years, as an assessable bonus with a 30% offset.

Related calculators and guides

This article is for general information only and does not constitute financial, tax or legal advice. Individual circumstances vary. Consult a registered tax agent or licensed financial adviser before making decisions based on this information.