This was happeing in v7.0 but never got around to posting.
I'm now running 7.01

My forums are members only, so i decided to make
a few forums readable only to guests.

Only the sub forum did not show as expected,
when its settings were changed to user group guests.

Parent is user group.

woops i should add i'm seeing the above when i log out
and become a guest.

user = registered
guest = no registered.

Not sure if its a bug or design behaviour.

That's designed behaviour. Since it's a child of the parent, if you can't see the parent, you won't be able to see the child.