The missing link in the CGT debate

Agree 100%. An absolute disgrace. But the hatred and envy of Labor towards older retirees is such that so long as those are hit, the rest are simply collateral damage.

Yes the 30% minimum capital gains tax rate is scandalous and needs to go.
For what it’s worth it is now officially coalition policy to abolish it.
My local MP (teal) voted against Labor’s tax increases so I’m feeling more kindly towards her now :)

If there was going to be a minimum, I would have thought that 15% (or thereabouts) would have been more appropriate. Setting the minimum at 30% appears a tax grab to me.

The Treasurer tells us that the new tax on capital gains is to ensure that investors (who will now pay a minimum of 30% CGT on ALL their capital gains) pay the same tax as salary earners. That is assertion nonsense, of course, because workers only pay 30% tax on the portion above $45,000. Because of the progressive nature of our tax system, tax on $45,000 is only $4020, or a little under 9%.

So let’s continue the nonsense and suggest that, in order to ensure that ordinary income is taxed the same as investment income, a teacher aid will need to pay tax on ALL of their income at a minimum of 30%. Their new tax on $45,000 is now $13,500, not $4,020. They will then be taxed the same as the PAYE taxpayer presently earning over $200,000, because it is only at that level that taxpayers pay a minimum of 30% tax on ALL their income.

Even worse, for assets acquired well before July 2027, the 30% rate applies to the entire realised gain; not only to that part of the gain which accrued post June 2027. Example: asset acquired in 2025 and sold in July 2027 for a gain of $18,000 would be taxed at 30% of $18K, but if sold one month earlier, the gain would be tax free. There’s an opportunity for some low income earners ( e.g.retirees on tax-free super pensions) to realise at least a small portion of their gains before July. 2027.

This is incorrect - the 30% tax rate only applies to that part of the net gains made post 1 July 2027. Existing arrangements (50% disc and marginal rates) applies to that part of the net gain made before 1 July 2027 (Source; ATO)

A thousand thank you's Tony for this article

What it's all really about is a Govt that cannot manage money, does not do in depth homework (i.e. test all possible scenarios as is done in s/ware engineering) when formulating a budget, cannot stick to a budget (everything they initiate has cost blow outs - e.g. Tafe service providers, NDIS service providers, Consultants etc)

So they come up with poorly designed ways to suck more money out of us - the folks that have invested for their own future, whether you are in your mid 20's or much older we all become retirees eventually.
Now, in 2026, after 30+ years of investing under one set of rules and paying taxes (income and cgt) they move the goal posts and kick you in the teeth to go on with. Bravo to JanH's comment re "30% regardless of your income bracket"
I fully expect to see JC announce that he plans to tax all foreigners living abroad - heaps of $ there surely ?
What a bunch of low life specimens they are.

Unfortunately due to our broken electoral system it is possible to secure a landslide election victory with just over a third of first preference votes (note: Labor won nearly two-thirds of all the seats in the House of Representatives at the last election) and to claim a mandate by stealth that the almost two thirds did not vote for. Even the third that did vote for them may have thought differently if they had known that the government “would change their position” on significant changes to taxation notwithstanding the PMs assurances “for the 50th time” that there were no plans for such changes.

I repeat my posting from last week to Kate that the “discount component is widely misunderstood, partly having to do too much work as shown in table below, which includes the element Tony refers to being an allowance for the retained/taxed undistributed profit component of the value of the share being sold. Complex, impossible to explain in standard print media, but real and one of the reasons for a simple “50%” formula which broadly works. Apologies that the item/Keating/Ralph comparison lines d’n't present here as the desired table format.

CGT/Indexation Item Component Items Keating Ralph
30% Minimum No No
Negative Gearing Yes Yes
Indexation Process Messy Discount -Simple
Wages/CGT same tax rate Yes NO
Averaging 20%/ Five Years Discount component
Symmetry -Real gains/losses No Discount component
Double Tax -Undistributed Profits Yes Discount component

The loss of averaging, the anti-symmetry and the double taxing are huge losses in the new proposals. All without proper explanation or disclosure. A disgrace, by all but particularly Treasury that is supposed to protect us from this nonsense.

Assuming away the indexation of the cost base and assuming zero payout ratio presents this comparison in the harshest light.

More realistic numbers, let's assume 14% RoE and 2x P/BV for the Australian market. Then the $70 of profit says BV is $500 and MV is $1,000. Assume 2% inflation (actually lower than history) and the investor gets a 2% on $1,000 cost base indexation benefit and their $70 of gains comes down to $50 of taxable gain, resulting in $23.50 of personal tax. Overall, therefore the tax rate would be 53.5%, so certainly higher.

BUT, most of that difference is because the company is acting against their shareholders' interests and hoarding franking credits, not because of the change in capital gains tax regime.

As lamentable as the recent tax changes may be, and the justifiable anger at the unscrupulous way by which the change was brought about, they are here to stay now. Coalition promises to over turn them, are likely a fantasy, as a conservative Senate majority as well as being elected to government, would also be required.

Equally, continual comparisons to how the tax used to be fairer only serve to make the wound fester. Speculation on what companies may or may not do with their capital too are futile. Time will tell and individual companies will make independent decisions for their operations, tax being but one consideration.

More pertinent, given the particular grievous nature of the 30% min CGT and how it disproportionately affects lower income earners, articles or suggestions on how best to address this gross injustice and discriminatory tax grab would be most welcome.

Let's hope their "solution" to this truly strange new policy isn't to remove dividend imputation as well.

Removing tax refunds from dividend imputation is Labor Policy, but just not for now. Bill Shorten tried it once and got burnt. The diehards will keep on trying.

As Tony points out a tax on investment income reduces investment, capital formation and productivity- all of which are necessary to increase employment and the taxable income it generates. So that we encourage investment over consumption, investment income, including bank interest, should be preferentially taxed compared to income derived from personal exertion.

Excellent comments from JanH .
VERY IMPORTANT.

Tony, another really good article.

Even more, I love the respectful comments and the back and forth when you reply to the readers. I can't think of another newsletter / website that does it so well. Any article like this needs to flesh out narrative but I love that your individual commenters' perspectives are diverse enough to flesh out and expand the discuss further.

Well done Tony and commenters.

A pleasure Fabio, thanks for the kind comment.

I think that your assumption that inflation is negligible is distorting your calculation. For example say inflation is 2.5% and you get a 6% return as a CG on your growth stock and 2% ff dividend on the same stock held for a year (so 75% of the $70 is CG and 25% is a dividend). Your 6% return is offset by inflation to be 3.5% then taxed at 47% so your 0.75 * $70 CG ($52.5) only 58%, ((6%-2.5%)/6%), of it is subject to tax so 0.58*52.5*0.47 gives $14.31 tax. The tax on the dividend would be 70/0.7*0.25*0.47=11.75 and add back the $30 company tax to get 14.31+11.75+30=$49.08 total tax paid. So total tax 49% on the $100, compared to 47% on your high yield stock. Also need to think about the total position because your share price has likely gone backwards on your high yield stock after inflation.

I am struggling to understand the comparison between NPAT assumed to be 100% paid out as a fully franked dividend and the same NPAT resulting in the same level of share price growth. Would it not be more relevant and realistic to ascribe further assumptions such as relative PE for high dividend stocks and low dividend stocks (say ASX200 vs S&P500) and the multi-year after tax returns? If the company is held for 5 years, and the dividend receiving investor receives $70 FFDs, growing each year by earnings growth with commensurate share price growth (assuming P/E constant, with a growing E) compared to the high growth stock that retains earnings, presumably with a higher P/E and higher Eg? That is, after n years, what is the total after tax return each investor gets factoring the opportunity cost of the additional tax on the FFDs.

I have tried to get my head around the new tax system in terms of changes to yield vs growth focus for investors and to me, it invariably comes out to the question "what investment strategy will most likely achieve my target outcome within the constrains of my risk profile given the prevailing tax system?"

This feels a little like the Div 296 tax argument with people saying they should withdraw from super. Sure, save a bit of tax but where will you then invest the withdrawn funds and what is the tax outcome of that?

Thanks for posting this Tony. Very insightful

Sorry, Tony, but this is a meaningless exercise!

I would say that it's like comparing apples and oranges, but I think that the two fruit have more in common than the elements in your comparison.

Why would you ever get the same capital gain for a share not paying a dividend as the net cash from that dividend? And why should the total tax take be the same (but only from a top-band taxpayer) in both cases? What is the policy imperative for that?

The reality, as Peter Wilmshurst implies, is that the company has a choice between distributing franking credits and reinvesting net profits. The financial impact on its shareholders will vary according to the characteristics of those shareholders (and their marginal Australian tax rate is just one of those characteristics). And, in turn, the financial impact on shareholders is just one of the considerations that the company must make.

It's fair enough to highlight the way in which discounting for inflation will change the balance between paying dividends and retaining profits. But don't pretend that the new regime has broken any kind of golden relationship between dividends and growth.

Hi Richard. You have missed the point of the article. And that is that the new tax arrangements have created a bias away from investing for capital growth towards investing for income.

And no. I’m not comparing apples with oranges. For the purpose of comparing tax outcomes, I have simply posited two economically equivalent ways of delivering the same after-tax corporate profit to a shareholder. And taken the argument from there. You have been too literal with the numbers. It may have been a situation of say, ten times $7 franked dividends versus $70 realised profit. Same numerical outcome. And I have used a top-band taxpayer to highlight the point. To show how far apart the effective tax rates could be.

And I’m not actually saying the tax outcome should be the same. Rather that the tax policies make dividend investing now more appealing than prior. In any case, there are strong reasons why taxing capital profits should be more favourable than taxing income. Cheers

Tony, I stand by my criticism and point you to my comment that it's fair enough to talk about the change in the balance between distribution and retention.

As to the apples and oranges, I'm not sure how many people contemplate how much of their capital gain is post-tax income of the company, let alone what that means in terms of the ATO's total tax take. I really don't think that you can meaningfully align them.

Lots of people say that there are strong reasons why taxing capital profits should be more favourable than taxing income, and then fail to present a single one. Add yourself to that list.

Ignoring the ridiculous 30% minimum, the new regime does tax (gross) capital profits more favourably than income, because of the CPI discount. Yes, there's a technical issue when gains are less than CPI, but that was in the pre-1999 version, too. (Amusingly, the EM for the new regime says that the non-indexation of losses is for the same good reasons as the pre-1999 regime, but doesn't bother to elaborate on that!) In what way should capital gains be further advantaged? Eliminating franking, perhaps?

Richard,

“As to the apples and oranges, I'm not sure how many people contemplate how much of their capital gain is post-tax income of the company, let alone what that means in terms of the ATO's total tax take. I really don't think that you can meaningfully align them.”

Total combined tax paid on corporate profit depending on whether it is distributed or realised, is highly relevant to the bias argument. I stand by the numbers presented here.

“Lots of people say that there are strong reasons why taxing capital profits should be more favourable than taxing income, and then fail to present a single one. Add yourself to that list.”

Reasons include: risk inherent in achieving gains, the ‘lock-in’ effect, inflation, and bunching of gains. I have actually covered these in previous articles, so maybe I don’t add myself to the list?

Evidence from the change in the CGT regime in 1999 does not support the argument that a change in the CGT regime will cause a change in dividend payout ratios. A paper by the RBA (link below) shows that the payout ratio increased after the full franking of dividends in the 1980's but was not affected by the change to the CGT regime in 1999. The dividend payout ratio has mostly bobbled between 60 and 80 per cent of listed company profits since the late 1980's.

See Figure 4 in the paper below.

https://www.rba.gov.au/publications/rdp/2019/2019-04/australian-equity-market-facts-1917-2019.html

Hi Stephen, thanks for the comment. A few things.

The 1999 and current reforms are not symmetrical. We had 1999 going from indexation with averaging of gains, to a straight 50% discount. While current change goes from 50% discount to indexation plus 30% minimum without reinstating averaging. The gap is wider with the current changes, and the fact that payout ratios didn’t visibly change after ’99, at an aggregate level, does not prove that the reversal today with its added disadvantages, will not change them.

Also, many factors go into determining payout ratios, and no observable change does not necessarily mean no tax effect. I argue that holding all else equal, that there will be a tax effect.

Finally, the paper focuses on aggregate payout ratios, but the ratio of mature companies to growth companies may have been different back then. Indeed, mature companies may have pulled back on payouts only to be overwhelmed by growth companies. We would need finer evidence to test the lack of movement in payout ratio after ’99. The lack of significant aggregate dividend payout ratio doesn’t really prove anything.

Tony, the available facts show that there was no change in payout ratios due to the 1999 CGT change but there was a significant increase in payout ratios after the introduction of franking credits in the 1980's. The rational conclusions to draw from those facts are that the introduction of full franking had an effect on payout ratios (they increased markedly) but that CGT tax changes in 1999 did not materially affected aggregate payout ratios.

Sure, there are many factors affecting payout ratios and that can be seen from the RBA graph as they have risen and fallen in the range of 60-80 percent of company profits since the introduction of the franking regime. However they did not suffer a significant and sustained fall in aggregate after the introduction of the 1999 changes. This suggests the current CGT changes won't see a significant and sustained rise in the aggregate payout ratio either.

Finally, over 80 per cent of ASX companies are owned by Australian super funds or foreign investors. As these investors face low rates of CGT (10% in the case of a super fund that has held the asset for a year in an accumulation account or zero if held in a pension account for any period of time), or none in the case of foreign investors if they hold less than 10 per cent of the company's shares, CGT changes will likely have a negligible effect on their behaviour.

Hi Stephen, thanks for the comments, and some interesting points. But while your focus is on payout ratios, I only mentioned it once in the article saying boards “may” face greater pressure to increase dividend payout ratios. I wasn’t definitive.

Meanwhile, the crux of the article was that the tax changes come at a time when productivity growth is virtually non-existent, and that these changes can only hinder that situation. The article wasn’t so much about payout ratios as it was about a tilt in bias away from investment in capital towards dividend paying stocks. Which doesn’t imply an increase in payout ratios. The tax bias is towards dividend paying stocks, whether payout ratios increase or not.

And just with the franking credits argument. Well yes, you would expect an increase in payout ratios when they were introduced in the ‘80s when the incentive to pay dividends is direct. But there was no direct incentive in 1999 with the CGT reform because it didn’t directly give shareholders or companies a new benefit. The behavioural link was weaker. It was a change in treatment of gains that may not be realised for decades. Meanwhile franking credits was an immediate and fundamental change to dividend taxation. So I maintain that the lack of significant movement in dividend payout ratio after 1999 is inconsequential to what I am saying in this article. Cheers

Stephen, just reading through the comments. Sorry, ‘is inconsequential’ is a bit strong. It’s more: ‘likely carries little weight’. Thanks, your references were worthwhile.

Tony,
The potential for the CGT changes to create an capital allocation bias towards dividend paying stocks implies that the investor making those capital allocation decisions currently has a bias towards return in the form of capital gains. That may be the case for fund managers who carry the career or professional risk associated with their allocations. For the individual investor who has a boring value-based orientation, I would have thought they would be attracted to the earnings profile a company operating in a 'growth' sector not the opportunity to realise a capital gain. From a pure strategy perspective, the act of selling means that the shareholder is foregoing the future income stream associated with that growing business for a fixed price today. Once the CGT change is overlaid, the benefits flowing from that fixed price is diluted by the impact of the new indexation model (without the benefits of averaging). In that case, it looks and feels like a double whammy for the pure momentum player.