Investment bonds - traditionally also known as insurance bonds - are considered tax paid investments because tax on earnings is paid at a fund manager level at a maximum rate of 30%. Depending on the fund, actual tax may be less due to imputation franking credits and other tax benefits. Provided the investment bond is held by an investor for a minimum of 10 years, no additional tax is payable and investment earnings do not need to be reported on the investors' annual tax return. For individuals that are paying a high marginal rate of tax, investment bonds can be a tax effective way to invest. See the following link for the Wikipedia definition.

Investment bonds are offered by a number of fund managers in Australia, and provide access to a range of asset classes and investment managers.

The '125% rule' allows investors to make additional investments each year to an existing investment bond of up to 125% of the investment contribution made in the previous year, with the contribution treated as if it was invested at the same time as the original investment. If utilised fully, this enables investors to add to their investment and get all the benefits tax free 10 years after the investment bond was initially set up.

The below summarises the maximum contribution that can be made based on an initial investment of $10,000 and subsequent contributions of 125% of the previous year. In the 10th year, for example, $74,506 can be invested and all earnings will have a tax paid status upon withdrawal after only one year.

Year | Contribution
1 | $10,000
2 | $12,500
3 | $15,625
4 | $19,531
5 | $24,414
6 | $30,517
7 | $38,147
8 | $47,684
9 | $59,604
10 | $74,506

Note that the 125% opportunity for investment bonds is not reset after 10 years.

Provided that an investment bond is held for a minimum of 10 years, earnings on the investment will not be assessable for tax. In the event that withdrawals are made within 10 years of the investment being made, tax may be payable.

Withdrawals made in the first 8 years
All earnings are taxed at the investor's highest marginal tax rate less an offset of 30% for tax paid at the fund level

Withdrawals made during the 9th year
One third of the earnings are considered tax paid, the remaining two thirds are taxed at the investor's highest marginal tax rate less an offset of 30% for tax paid

Withdawals made during the 10th year
Two thirds of the earnings are considered tax paid, the remaining one third is taxed at the investor's highest marginal tax rate less an offset of 30% for tax paid

Withdrawals made after 10 years
All investment earnings are considered tax paid