Are Investment Bonds Worth It in Australia? Why the 2027 Tax Changes Could Change the Answer
Investment bonds have been around forever, but I’ll be honest, for most of my career they haven’t been something I’ve found myself getting particularly excited about.
Superannuation is wonderfully tax effective. Outside super, individuals and family trusts have historically had the benefit of the 50% capital gains tax discount on eligible investments held for more than 12 months.
Against that backdrop, an investment bond paying tax internally at up to 30% was often a fairly hard sell.
But the backdrop is changing.
From 1 July 2027, the 50% CGT discount is being replaced with an inflation-based system and a minimum 30% tax on real capital gains. The Government has also proposed a minimum 30% tax applying to many discretionary trusts from July 2028.
All of a sudden, that 30% tax rate inside an investment bond doesn’t look quite as uncompetitive as it once did.
Are investment bonds worth it in Australia?
Investment bonds may be worth considering if you’re building long-term wealth outside super, particularly if you’re on a higher marginal tax rate. Earnings are taxed within the bond at up to 30%, you can generally switch between the investment options available within it without personally triggering CGT, and after 10 years withdrawals can usually be made without additional personal tax if you’ve followed the rules.
Whether one actually leaves you better off is another question. Your tax rate, investment timeframe, fees, investment choices and contribution pattern all matter.
That’s why I don’t think the story here is investment bonds are suddenly brilliant.
The more interesting story is that the things we’ve traditionally compared them with are changing.
I recently unpacked this on the Financial Autonomy podcast because I think anyone building a decent pool of money outside super should at least understand the option. You can listen to the episode below.
What is an investment bond?
The name doesn’t help.
When people hear investment bond, they quite reasonably assume we’re talking about fixed interest or government bonds.
We’re not.
An investment bond is really an investment wrapper. Depending on the provider, you might have Australian shares, international shares, property securities, fixed interest or diversified portfolios sitting inside it.
The interesting bit isn’t so much what you invest in. It’s what happens to the tax.
Rather than dividends, distributions and capital gains generally flowing through to your personal tax return each year, tax is dealt with within the investment bond itself.
In that sense, there are some similarities with super. You’ve got investments sitting inside a structure and the structure deals with the tax.
How are investment bonds taxed in Australia?
The headline tax rate within an investment bond is 30%.
That doesn’t necessarily mean exactly 30% is ultimately paid. Depending on what is held inside the bond, things such as franking credits, deductions and foreign tax credits can reduce the effective rate.
You can probably see why that starts to become interesting if you’re paying tax personally at a higher marginal rate.
There’s also a practical benefit that I think is easy to overlook.
Let’s say you have a portfolio in your own name. Over the years you receive dividends and distributions. You might sell one investment and buy another. A managed fund might distribute a capital gain even though you haven’t personally sold anything.
All of those things can find their way into your tax return.
Inside an investment bond, the tax is dealt with internally. You can also generally switch between the investment options offered by the provider without personally triggering CGT every time you make a change.
For money that is genuinely going to be invested for a long time, that can be useful.
Are investment bonds tax free after 10 years?
No, and this one drives me a little mad because you see it repeated everywhere.
Investment bonds are not tax free after 10 years.
Tax continues to be paid within the investment bond. What changes after the relevant 10-year period is that you can generally withdraw the money without paying additional personal income tax.
That might sound like splitting hairs, but it’s an important distinction.
If you withdraw earlier, some of the earnings can be included in your assessable income. Broadly, the amount included reduces as you get closer to the 10-year mark.
Within the first eight years, the full relevant earnings amount can be assessable. In year nine it reduces to two-thirds, then one-third in year ten. Once you’re beyond the 10-year period, there is generally no additional assessable amount.
So when I’m looking at an investment bond, one of the first questions is pretty simple:
Is this genuinely long-term money?
If you think there’s a decent chance you’ll need it in five years, that changes the conversation considerably.
What is the 125% rule for investment bonds?
This is another one of those rules that sounds incredibly dull until you accidentally get it wrong.
Once you’ve started an investment bond, you can generally contribute up to 125% of what you contributed in the previous bond year without restarting the 10-year period.
So if you contribute $20,000 this year, you could generally contribute up to $25,000 next year.
Where people can get caught is assuming they can open a bond with a small amount now and throw a much bigger amount into it later.
It doesn’t necessarily work that way.
If you contribute nothing in a year and then start contributing again later, the 10-year period can also recommence from that later contribution.
That’s why I wouldn’t look at the initial contribution in isolation. You need some idea of what you’re likely to contribute over the years that follow.
Get that wrong and you can change the very tax treatment you bought the investment bond for in the first place.
Why could the 2027 tax changes make investment bonds more attractive?
This is really the reason I’m talking about investment bonds now.
For a long time, one of the big arguments against them was the capital gains tax comparison.
If you owned an eligible investment personally or through a trust and held it for more than 12 months, you could potentially benefit from the 50% CGT discount.
An investment bond didn’t have that same advantage.
From 1 July 2027, that comparison changes. The existing 50% discount is being replaced with an inflation-adjusted cost base and a minimum 30% tax on real capital gains.
That doesn’t suddenly make investing personally a bad idea. Far from it.
But if you did the maths on investment bonds five years ago and decided they didn’t stack up, I wouldn’t assume you’d get the same answer today.
The investment bond hasn’t changed all that much. The tax environment around it has.
For me, that’s the part worth paying attention to.
Investment bond vs family trust: which is better?
I’d start with a different question:
Why do you have the trust?
Family trusts can be incredibly useful. They can provide flexibility around distributions, they can play a role in asset protection, and for business owners in particular they can do things an investment bond simply can’t.
If that’s why your trust exists, comparing it with an investment bond purely on tax is missing half the picture.
But there are also plenty of people who have a family trust largely because it has been a tax-effective place to hold long-term family investments.
That’s where things get more interesting.
The Government has proposed a minimum 30% tax applying to many discretionary trusts from 1 July 2028.
If tax efficiency was the main reason you set up the trust, it’s reasonable to ask whether the structure will still be doing enough work for you once the rules change.
Then there’s the admin.
A family trust usually means annual tax returns, resolutions, accounting fees and compliance. With an investment bond, much of the tax administration happens inside the structure.
I’m not suggesting everyone with a trust should shut it down and buy an investment bond. That would be ridiculous.
I am saying that the old answer shouldn’t automatically be assumed to still be the right one.
Investment bond vs super: where might one fit?
Super remains the first place I’d be looking in many cases.
It’s extremely tax effective and, if the money is genuinely for retirement, very difficult to beat.
But super isn’t infinitely available.
There are contribution caps and balance restrictions. There are also rules around when you can get your money out, and that matters if you’re trying to build wealth that you may want access to before retirement.
Eventually, some people reach the point where the more useful question becomes:
I’ve done what makes sense in super. Where does the next dollar go?
It might be invested personally.
A family trust might still make sense.
Or, under the new rules, an investment bond might be worth putting into the mix.
That’s how I tend to think about them. They’re not really a replacement for super. They’re one of the options for the money that needs to sit outside it.
What are the disadvantages of investment bonds?
There are plenty, which is why this isn’t a blanket recommendation.
If your personal tax rate is below 30%, paying tax inside an investment bond may leave you worse off than simply holding the investments yourself.
If you might need the money well before 10 years, a lot of the appeal starts to disappear.
If you get the 125% rule wrong, you can upset the tax treatment you were relying on.
Fees matter too. There’s no prize for saving some tax if the extra investment or administration costs chew up the benefit.
And you’re working within the investment menu provided by the bond provider. That means the available investments need to be appropriate as well.
Whenever I’m comparing structures, I’m much less interested in saying this one pays 30% and that one pays 47%.
What I actually want to know is:
How much money are you likely to have at the end after tax, fees and investment returns?
That’s the comparison that counts.
Can investment bonds be used for children or grandchildren?
Yes, and this has always been one of their more interesting uses.
Perhaps you have a five-year-old grandchild and you want to put aside a pool of money that they’ll eventually receive in their twenties.
You probably don’t want to hand the investment directly to a five-year-old, for fairly obvious reasons.
An investment bond can allow the money to remain invested for a long period with the tax dealt with inside the structure. Depending on the bond and how it’s set up, you may also have some control over when ownership ultimately passes.
Investment bonds can also allow beneficiaries to be nominated, which creates some interesting estate-planning possibilities.
That won’t be relevant to everybody, but for families thinking deliberately about passing wealth to the next generation, it’s worth knowing the option exists.
So, are investment bonds worth another look?
For some people, yes. I think they are.
That’s a very different statement from saying everyone should have one.
There are still plenty of circumstances where investing personally, using super or maintaining a family trust will make more sense.
What has changed is that I no longer think investment bonds should automatically sit in the too-hard or probably-not-worth-it pile.
If you’re building a decent amount of wealth outside super, I think it’s worth revisiting the question rather than relying on a comparison you might have made under the old tax rules.
Sometimes you’ll run the numbers and conclude that what you already have is still the best option.
Great.
Other times, the changing tax rules may produce a different answer.
That’s why I’d always start with the plan and work backwards to the structure, rather than choosing a structure because somebody told you it was tax effective.
Want help working out how to structure your investments?
If you’re building wealth outside super, the important question isn’t whether investment bonds are good or bad.
It’s whether the way you are holding your money gives you the right combination of tax efficiency, flexibility and long-term growth.
At Guidance Financial Services, we can look at your super, investments, tax position and broader financial goals together and work through the different options.
We don’t have investment products to sell. So there’s no need for us to find a reason to recommend an investment bond, a new super fund or anything else. Sometimes the answer will be that what you already have is doing exactly what it needs to do.
If the changes coming in 2027 and 2028 have you wondering whether your current investment structure still stacks up, book an initial appointment with us and we can help you work through it.
This article is for educational purposes only and does not take into account your individual circumstances. If you would like tailored advice, we can help you work through the numbers properly.
