While the outcome will depend on your investment vehicle, before we dive deeper, there are a few key points to keep in mind. The proposed CGT changes are not yet law, but the Government has announced that from 1 July 2027, the 50% CGT discount would be replaced with CPI cost-based indexation and a 30% minimum tax rate (after indexation) on capital gains for individuals, trusts, and partnerships.

The 30% minimum tax rate is the real kicker. Regardless of your personal tax position or any losses you have incurred, this is the minimum starting point. The capital gains tax could be as high as 47% on the amount above the indexation threshold. While we thought the Government might be moved by the “feedback”, they have only allowed two days of “consultation” before the legislation will be passed through the Lower House. We believe the Government will have safe passage with the support of the Greens, and this will become law.

What is the impact of this legislation?

The first point to make is that superannuation is exempted and remains in the current system. This discussion is confined to all monies outside of superannuation.

The minimum 30% tax on capital gains will encourage investment in lower-risk income strategies rather than higher growth strategies. The reason is that lower-risk assets trade off growth for income in the composition of total return.

Growth funds will no longer receive the 50% CGT discount, exposing the returns to greater taxation risk. Currently, for a high-income earner at the maximum tax rate of 47%, the effective tax rate on the sale of growth assets is 23.5%. The new regime will set a minimum floor of 30% and a maximum of 47%. The impact is demonstrated in the chart below, which compares two strategies earning the same 10% pre-tax return: one paying a fully franked 5% dividend plus 5% growth, and a growth strategy where 10% is derived purely from capital growth.

This raises the question of how much more income the market can pay.

Below is the Dividend payout ratio for the Australian share market compared to other nations. The average payout for Australian companies is 75% – the highest in the world.

However, the downside of a high payout rate is negligible productivity, low levels of Research and Development and very little retained earnings by Australian Companies. It can reasonably be concluded that the effect of this legislation will be to further encourage shareholders to seek even higher income streams from Company management, entrenching these weaknesses.

I have attached the Australian Productivity table from the ABS, which shows declining productivity across the nation.

What does all of this mean in terms of how we invest?

Firstly, it is questionable whether you should invest in your own name, given the 30% minimum tax provision.

Superannuation has become a very attractive investment environment compared with investing via Trusts, Companies, or in your own name. And while superannuation may well be attractive for those in their fifties, what about for those who are younger?

We have written articles previously on the return of the Investment Bond. Investment Bonds will become a very attractive vehicle given the protective CGT treatment and access to a range of investments.

I will write further on this next time.