Division 296, proposed in 2024 was to add a new layer of complexity to an already complicated landscape. With other tax reforms now anticipated following the government’s recent Productivity Roundtable discussions, advisers who rely on “business as usual” to deal with the financial regulatory environment may risk overlooking one of the most tax-effective and flexible structures available: investment bonds.

At the recent Productivity Roundtable discussions, the government reinforced its commitment to reshaping Australia’s tax system to ensure sustainability and equity, with wealth taxes still one of the areas of focus. Over the past decade, there have been constant changes to superannuation - from the introduction of Division 293 in 2012, to the legislated objective of super in 2024, and the government’s lastly proposed Division 296, which would impose an additional tax on earnings from super account balances above $3 million, has yet to be confirmed as abandoned.

Financial advisers are exploring strategies as tax and regulatory reforms increasingly constrain wealth structures. With clients seeking alternative solutions for wealth accumulation and intergenerational transfers, investment bonds continue to gain strong momentum as one of the most flexible and tax-effective options.

Why investment bonds aren’t as “niche” or “old-fashioned” as you may think.

A prevailing view among advisers is that investment bonds are defined by capped tax and the 10-year rule. But that’s only part of the picture. In reality, investment bonds have evolved into a far more versatile structure - supporting tax-effective, wealth transfers and estate planning peace of mind.

Here are seven features that make them worth a second look:

1. Tax paid, not tax passed on

Unlike trusts that ordinarily push taxable distributions onto clients each year, investment bonds are internally tax-paid (up to 30%) with no distributions. In practice, tax-aware investment options available within some investment bonds can help achieve much lower long-term effective annual tax rates - often in the 10–15% range¹. That means no messy end-of-year surprises such as unplanned assessable income and unforeseen tax consequences, that may enable far greater predictability for long-term planning.

2. More control over wealth transfers

Investment bonds can be structured to sit outside the estate and allow clients to nominate beneficiaries directly - even with conditions. Nominations are binding, providing greater certainty that the death benefit will be paid tax-free to the intended recipient(s). Ownership can also be transferred seamlessly across generations (or to any person for that matter) either while the investment is held, upon the passing of the owner or a future date, all without triggering an assessable tax event.

3. Access without the handcuffs

Clients can withdraw funds from an investment bond at any time if life takes an unexpected turn. Such flexibility and structure make investment bonds a more than viable vehicle to seriously consider.

4. A tool against “bracket creep”

Earnings are taxed and held within the investment bond with otherwise distributable income accumulating. Investment bonds can help shield clients from being pushed into higher brackets, by not distributing assessable income year-on-year. For clients worried about rising personal tax rates, this can help manage and improve after-tax outcomes.

5. Estate certainty and creditor protection

When structured as a non-estate asset, an investment bond may mitigate estate disputes and challenges - ensuring wealth lands exactly where clients intend. That level of comfort is a strong differentiator particularly when the success rate for estate challenges is 74%². Investment bonds appropriately structured can also be protected from creditors in the event of bankruptcy of the owner.

6. The truth about the 10-year rule

Often misunderstood as a lock-up, it’s really a tax-timing benefit. Clients can withdraw anytime - but after 10 years (if the 125% rule is followed), withdrawals are completely non-tax assessable. Importantly, contributions can continue (provided the 125% rule is met) without resetting the clock.

7. Simplicity and freedom from red tape

No TFNs, no annual tax returns, no CGT tracking. Also, there are no contribution caps, withdrawal age limits, or preservation rules. Clients can contribute lump sums or regular amounts, and invest in a wide menu of investment options according to their risk profiles.

How investment bonds may be used

Super, trusts and companies all have their place. The unique features of investment bonds means that, in the right scenarios, they can deliver stronger after-tax outcomes for clients, often with less complexity. The key is knowing when - and how - to integrate them.

Case Study: Comparing alternative tax structures

John, 50, is a medical specialist, who given his profession, is subject to malpractice risk. He has surplus income of $50,000 per year after PAYG tax and his earnings put him on the highest marginal tax rate of 47% (including Medicare levy). He also has a super balance of over $3 million and, if brought in, some super earnings would be subject to the additional 15% Division 296 tax.

John recently received a $500,000 death benefit payment from his late mother’s super (after paying his share of death benefit tax). Due to John’s total super balance, he can no longer make non-concessional contributions into his super. He intends to continue working but would like the flexibility to access his funds before fully retiring. He also wants to reduce his working hours from after age 60.

John’s financial adviser puts forward three options for John to invest his death benefit payment proceeds and surplus income in alternative structures. His adviser presents the options along with anticipated after tax proceeds after being invested for 15 years, about:

1. Investment company = $2.92 million

2. Discretionary trust with a corporate beneficiary = $3.73 million

3. Investment bond = $4.22 million

The numbers are compelling – the investment bond offers an increased return of $1.3 million when compared to the Investment Company and $490,000 more than investing through a private trust with a corporate beneficiary.

By investing in an investment bond John has:

• The ability to access funds at any time for when he decides to reduce his work hours.

• A tax effective investment structure.

• Simple ongoing administration and monitoring with no set up costs.

• No potential Division 7A issues and requirements to manage that may otherwise arise when utilising corporate structures such as “bucket” companies.

• No deferred tax impact, often the case where corporate entities are used to hold investments.

• The benefit of the investment being protected from creditors in event of bankruptcy.

• The ability to set up the investment a non-estate asset, giving him flexibility in how and when to pass his wealth on.

The opportunity for John’s adviser is clear. Investment bonds provide a strategic and tax-effective solution that preserves flexibility and ensures access to funds at any time. While this case highlights the benefits of tax-effective investing, investment bonds can also deliver strong outcomes in other scenarios - such as intergenerational wealth transfers and estate planning.

Investment bonds are a viable, complementary and future-fit alternative to other structures

John’s case underscores a broader truth: investment bonds offer what traditional structures often cannot - simpler, more predictable outcomes and a level of confidence that advisers and their clients can rely on.

Tax reforms such as the proposed Division 296 superannuation tax, along with other potential reforms signalled by government, highlight the likelihood of ongoing changes and the need to diversify into alternative investment structures.

Over the past three decades, dozens of reforms have reshaped the tax and superannuation system. Investment bonds have remained consistent, with no major regulatory changes since 2002 - providing something rare in financial planning: reliability.

In a system where certainty is hard to come by, tax simplicity and flexibility remain core to the design of investment bonds. That’s why, many advisers have rethought and incorporated investment bonds within a diversified strategy - not as a niche product, but as a viable, complementary and future-fit solution.

¹ Indicative effective average tax rates for Growth focused Tax Optimised investment options. The effective average tax rates represent the estimated average annual tax as a percentage of earnings for each 12-month period over a forecast period of 15 years. Actual tax amounts payable are not guaranteed and may vary from year to year based on the earnings of an investment option.

² (Successful family provision claims, subject to successful claims/total claims not started). Source: UNSW Law Journal, Estate Contestation In Australia: An Empirical Study Of A Year Of Case Law, 2015: https://www.unswlawjournal.unsw.edu.au/wp-content/uploads/2017/09/38-3-15.pdf