When it comes to fixed-income investing, some terms are thrown around by fund managers and accountants that can leave everyday Australians scratching their heads. ‘Accretion of discount’ is one such phrase, but in 2025, it’s a concept that’s becoming increasingly relevant as more Aussies diversify into bonds and structured debt. Here’s what you need to know about accretion of discount, how it affects your investments, and the latest regulatory updates impacting your returns.
What Is Accretion of Discount?
Accretion of discount refers to the gradual recognition of the difference between a bond’s purchase price (if bought below face value) and its par value, as income over the bond’s life. Imagine you buy a government or corporate bond at a discount—say, for $950, with a face value of $1,000, maturing in five years. The $50 gap isn’t all received at maturity; instead, it’s typically accounted for as income each year until maturity. This process is called ‘accretion,’ and the discount is effectively ‘earned’ over time as the bond approaches par value.
- Why does this happen? Market rates, issuer credit risk, and bond features often cause bonds to trade below their face value.
- How is accretion calculated? The most common method is the constant yield method, which spreads the discount as income in proportion to the bond’s yield to maturity.
Real-World Example: Accretion in Action for Australians
Suppose you buy a 3-year Australian government bond in 2025 for $9,700 with a face value of $10,000. Over the three years, the $300 discount is ‘accreted,’ or recognised as income, on your annual tax return. If the bond pays no regular coupon, your total return comes from the accretion plus the eventual repayment at face value. This is a common scenario for investors in zero-coupon bonds or discounted fixed-income ETFs.
Why it matters: If you’re holding these instruments in a portfolio—directly or via a managed fund—accretion of discount will impact your annual taxable income and reported returns, even if you don’t see the cash until maturity or sale.
Tax Implications and 2025 Regulatory Updates
In Australia, the ATO treats the accreted discount as assessable income, not capital gain, for most bonds and fixed-income securities. The way this income is reported and taxed has evolved, especially with the ongoing push for greater transparency in managed funds and listed investment trusts (LITs).
- 2025 ATO Guidance: As of July 2025, updated ATO guidance clarifies that accreted discount on both domestic and foreign bonds must be included in your tax return each year, whether you receive physical payments or not. This is part of a broader move to close tax loopholes and align reporting for all fixed-income products.
- Portfolio Reporting: Most Australian fund managers and online brokers now provide year-end statements that break out accreted discount income, making it easier to comply with ATO rules.
Investors who hold discounted debt through superannuation funds or SMSFs should also pay attention, as the treatment can affect concessional and non-concessional contribution caps.
Investment Strategies: Why Accretion of Discount Matters in 2025
With interest rates in Australia stabilising after the rapid rises of 2022–2023, more investors are eyeing discounted bonds as a way to lock in higher yields and capitalise on price appreciation. Understanding accretion of discount helps you:
- Compare true yields: The headline yield on a discounted bond may understate your real income if you ignore accretion.
- Manage tax outcomes: Accreted income can push you into higher tax brackets or affect eligibility for offsets and benefits.
- Assess fund performance: Many fixed-income ETFs and managed funds report performance both before and after accounting for accretion, which can be a key differentiator in volatile markets.
For example, in 2025, several popular ASX-listed fixed-income ETFs (like IAF and VGB) have seen an uptick in accreted income as they rotate into discounted bonds issued during the recent rate hikes. This means higher reported income distributions, but also potentially higher tax bills for unitholders.
Conclusion: Stay Savvy with Fixed-Income Taxation
The accretion of discount isn’t just an accounting technicality—it’s central to understanding the real returns and tax impacts of your fixed-income investments in 2025. With the ATO tightening the rules and more Aussies looking to bonds for stability, taking accretion into account is essential for smarter portfolio planning.
