Budget’s CGT changes will shift adviser approach to client portfolios

The Labor government’s blockbuster changes that will roll back capital gains tax (CGT) and negative gearing concessions have already left advisers re-thinking client investment strategies. 

Announced in Tuesday night’s FY27 budget by Treasurer Jim Chalmers, from 1 July 2027 the 50 per cent CGT discount will be replaced by cost-base indexation for assets held for more than 12 months, with a 30 per cent minimum tax on net capital gains.

These changes will apply to all CGT assets, including pre-1985 CGT assets, held by individuals, trusts and partnerships; however, transitional arrangements will limit the impact on existing investments by ensuring the changes only apply to gains arising on or after 1 July 2027.

The 50 per cent CGT discount will continue to apply to gains arising before 1 July 2027, but capital gains on pre-1985 assets arising before 1 July 2027 will remain exempt from CGT.

To incentivise new housing supply, investors in new residential properties will be able to choose either the 50 per cent CGT discount or the new cost-base indexation regime introduced in Tuesday night’s budget. Income support payment recipients, including Age Pension recipients, will be exempt from the minimum tax.

Negative gearing will be abolished for new purchases, with the exception for new residential property builds and properties in widely held trusts and superannuation funds being excluded.

The change kicks in from 7.30pm on 12 May, and properties acquired prior to this time, including contracts entered into but not yet settled, will be exempt from the changes until disposed of.

From 1 July 2027, losses from established residential properties will only be deductible against rental income or the capital gains from residential properties, but excess losses will be carried forward and offset against residential property income in future years.

The changes are estimated to increase revenue by $3.6 billion over the next five years.

There will also be a 30 per cent minimum tax introduced on taxable income from discretionary trusts from 1 July 2028, which is estimated to increase tax revenue by a further $4.5 billion over the five years. Beneficiaries, other than corporate beneficiaries, will receive non-refundable credits for the tax payable by the trustee.

Re-thinking client strategies

The changes will impact how financial advisers handle client portfolios and Escala head of advisory Scott Carmichael says the impact of the changes could be meaningful and potentially long-term in nature.

However, he cautions investment decisions should ultimately be driven by the long-term merit of the underlying asset, rather than solely the tax outcome, and that principle remains important regardless of the budget cycle.

“It won’t just influence what tax investors pay, but may also shape how they structure, hold and transfer wealth over time,” Carmichael says.

“Changes to CGT, negative gearing and trusts are not simply administrative tweaks, rather, depending on the final detail, they could influence the economics of long-term investing and broader investor behaviour for years.”

Your Vision Financial Services director and financial adviser Patricia Garcia says the biggest change for client strategies is that the budget’s proposals alter the after-tax return assumptions that have underpinned many long-term strategies, particularly in property but also in growth-oriented share portfolios.

A few themes her firm has already been discussing with clients include less reliance on capital growth as the primary driver, greater focus on cash flow and yield, behavioural impacts and longer holding periods and short-term timing decisions if changes are confirmed.

Garcia says if the CGT discount is reduced or replaced with indexation, capital gains become more heavily taxed, which reduces the attractiveness of strategies built primarily on long-term growth.

“We would expect a gradual shift toward investments with stronger income characteristics where returns are not as dependent on a large gain on exit,” Garcia says.

“Furthermore, this will require more careful planning to try to minimise the eventual capital gain tax as much as possible as well as incorporating the likely tax into clients’ retirement planning, for example, to ensure the outcome is still sufficient to meet their retirement goals.”

Furthermore, Garcia says investing in shares/liquid assets compared to property may be even more appealing to help better manage tax outcomes.

“An investment property needs to be sold all in one transaction whereas shares can be sold over time and specific units can be sold at different times to reduce the overall capital gains tax,” Garcia says.

Forest Wealth certified financial planner Sam Ryma says that no strategy implemented for a client is done purely for the tax benefit, but it is a piece of the puzzle.

“This means that investing in shares or managed funds isn’t going to change or slow down, but the structuring piece is going to become more important,” Ryma says. 

“Investment savings bonds will be a structure that become even more popular with the double whammy of changes to super and now the potential removal of the CGT discount.”

Super strategy

Carmichael says the best strategy for investors is still to wait and assess the detail of any changes, including timing, implementation, and transitional arrangements as the risks of reacting too early can be significant.

“Investors may crystallise capital gains unnecessarily, trigger stamp duty, create unintended estate planning consequences, or move capital into structures that may reduce future flexibility,” Carmichael says.

As was the case with the Division 296 changes, which saw the concessional tax rate on large super balances increased, it’s important to wait for confirmed details, he adds.

“At this stage, there is still uncertainty around the final treatment of areas such as deductibility, negative gearing and capital gains tax,” Carmichael says.

“In many cases, pre-emptive action before legislation is settled can create unintended outcomes. Clarity around timing and implementation will be just as important as the changes themselves.”

Apt Wealth senior financial adviser Dermot Reiter says if the changes don’t apply in the superannuation regime, then super “looks a lot better” despite the Div 296 changes.

“For those in the high-net-worth space, that are above $3 million in their super balance, they might be perfectly happy paying an additional bit of tax between $3 million and $10 million as opposed to jumping at shadows and taking the money out and being exposed to a tax rate that’s much higher,” Reiter says.

Reiter says the tax changes will affect some business-owning clients who are relying on the value of their company as a retirement plan.

“If all of a sudden you go from a 50 per cent discount to an indexation model, they’re going to be taxed on a much higher proportion of the gain that ultimately is their retirement plan,” Reiter says.

“There’s not a lot of thought that’s gone into that, I know there’s been talk of some carve-outs for farmers.”