By Rachel Waterhouse, CEO, Australian Shareholders’ Association
Parliament has settled the law, not the argument. The Government should use the period before 1 July 2027 to reconsider the reforms’ impact on investors and productive investment.
Preparation should not be mistaken for acceptance.
Passing legislation provides certainty about what the law says. It does not prove that the law is fair, efficient or good for Australia’s investment future.
From 1 July 2027, the 50 per cent capital gains tax discount will be replaced for most investments held by individuals by inflation-based cost-base indexation, alongside a 30 per cent minimum-tax mechanism.
Although announced alongside housing measures, the changes form part of a broader tax reform package. The Government says they will ensure investors are taxed on real rather than nominal gains, treat asset classes more consistently and better align the taxation of income from work and assets.
However, the CGT changes reach much further than housing. They will affect Australians who invest in listed companies, growing businesses and other assets as they seek to build financial independence outside superannuation.
This is not only a debate about how much tax investors should pay. It is also a question of whether the tax system will influence where, when and how Australians invest and, ultimately, Australia’s prosperity.
Investors are considering changing their behaviour
ASA’s Investor Sentiment Survey received 1,112 responses.
The survey covered a broad range of issues affecting retail investors and was not limited to seeking views on the CGT reforms.
Nearly 70 per cent of respondents said the changes would make them less confident investing outside superannuation. Just over half said they may consider selling assets before 1 July 2027, while 51.5 per cent said they may favour income-producing investments over growth investments.
More than half expected to need paid advice, and more than 70 per cent wanted guidance and worked examples.
These findings should not be interpreted as a prediction that every investor will sell before the reforms commence. They show that tax uncertainty may influence investors in different and potentially opposing ways.
Some investors may bring forward sales. Others may delay selling or rebalancing their portfolios, perhaps until after the next election, in the hope that a future government changes the law.
Both responses are concerning. Whether investors sell earlier than they otherwise would or hold an asset for longer than they believe is appropriate, tax considerations are influencing decisions that should primarily be based on performance, risk, suitability and long-term prospects.
When around one in two survey respondents says they may consider selling before a reform commences, that is an important warning. Investor feedback suggesting others may defer decisions reinforces the broader risk of tax-driven behaviour.
Tax should not determine the investment structure
The strongest concern is not that every growing company will immediately lose access to capital. That would be difficult to establish before the reforms commence.
The more direct concern is that tax settings should not push investors towards particular assets or structures for tax reasons rather than investment merit.
Differences in how capital gains, indexation and the minimum-tax mechanism operate make it challenging for investors to compare a direct shareholding, an exchange-traded fund, a listed investment company, a managed fund or another investment according to its performance, costs, risks and suitability.
Tax treatment should not create an artificial incentive to favour one structure over another.
The same principle applies when investors choose between assets offering income today and companies reinvesting earnings to support future growth.
Investing in a growing Australian company involves uncertainty. Some businesses will perform strongly, while others will fail. Successful investments must compensate investors for losses, volatility and years of risk.
A tax system that makes investors materially less willing to hold growth assets or invest outside superannuation may affect the flow of capital to smaller companies, biotechnology, technology and other businesses that depend on patient investment.
It is not necessary to predict the exact size of that effect to recognise the risk. The Government should be seeking to minimise tax-driven distortions before they become embedded in investor behaviour.
Direct ownership also matters
Direct shareholders contribute more than capital.
They vote, attend company meetings, question boards and hold directors accountable. An engaged retail shareholder base can strengthen the connection between listed companies and the Australians whose savings help fund them.
A tax-driven movement away from direct share ownership and towards pooled structures could reduce that participation, particularly among smaller listed companies.
The issue is therefore broader than the tax payable when an asset is sold. It concerns the type of investor participation Australia wants to encourage.
Preparation, not panic
The legislation contains important transitional protection. Broadly, gains accrued up to 30 June 2027 retain the existing 50 per cent discount treatment, even where the asset is sold later. The new arrangements apply to gains accruing from 1 July 2027.
That is an important reason investors should not rush to sell solely because the commencement date is approaching.
It is equally important not to retain an investment solely in the hope that a future election will result in another change to the law.
“Sell everything before the rules change” is not an investment strategy. Neither is “hold everything until the rules change”.
Selling may crystallise tax earlier, incur transaction costs and leave an investor searching for a replacement for a sound holding.
Conversely, postponing a sale may leave an investor overly exposed to one asset, prevent sensible portfolio rebalancing or keep capital tied to an investment that no longer meets their needs.
The appropriate decision will depend on the investment, the investor’s circumstances and how the transitional provisions apply.
Investors considering significant changes may need tax advice. Licensed financial advice may also be appropriate where decisions involve diversification, retirement planning or broader financial objectives.
The Government must provide clear guidance on how gains arising before and after 1 July 2027 will be separated, including market valuations, approved apportionment methods, capital losses and the treatment of shares, ETFs, listed investment companies and managed funds.
The Government should reconsider the law before commencement
The Government should not wait until after 1 July 2027 to determine whether the reforms have discouraged investment outside superannuation, direct share ownership or investment in growth assets.
Monitoring the effects after commencement will be necessary, but it is not a substitute for reconsidering the design now.
Before the reforms commence, the Government should reconsider the removal of the existing discount from non-property investments and amend the law to avoid discouraging direct and productive investment.
It should publish detailed economic modelling of the likely effects on different asset classes and investment structures.
That modelling should examine both the possibility of investors bringing forward sales before 1 July 2027 and the risk that investors delay future sales for tax reasons. This should include the potential effects on portfolio rebalancing, market participation and the efficient allocation of capital.
The Government should also release the examples, calculators and administrative guidance investors need well before they are required to make decisions.
Parliament has passed the legislation, but implementation remains almost a year away. That period should be used to listen to investors, companies, fund managers and professional bodies and to address the numerous unintended consequences they have identified.
Passing legislation should not end the debate, particularly given the limited opportunity for consultation on the non-residential effects and the significant concerns that remain.
The real test is whether Australians remain willing to invest in Australia according to the merits of an opportunity, rather than being pushed towards a particular asset, structure or timing decision by the tax system.
