The Federal Budget, Capital Gains Tax and What It Means for Income Investors

For investors who have built portfolio strategies around the long-standing 50% CGT discount, the shift is material. For those already allocated to income-producing strategies, the relative picture looks quite different.

This article sets out what has changed, the mechanics behind why income-focused investments are treated differently under the tax code, and what we are observing in terms of how investors and their advisors are beginning to respond. It is intended as general educational commentary only and does not constitute financial or tax advice. Readers should consider seeking independent professional advice having regard to their own circumstances.

Background: How Capital Gains Have Been Taxed in Australia

To understand the significance of the proposed changes, it helps to first understand the framework that has been in place. Under Australian tax law, when an investor disposes of an asset held for more than 12 months, any gain on that asset has historically been eligible for a 50% CGT discount before being added to assessable income and taxed at the investor's marginal rate.

For a high-income investor, this effectively meant that long-term capital gains were taxed at roughly half their marginal rate. For an investor on the top marginal rate of 45%, a capital gain held for more than 12 months was taxed at an effective rate of approximately 22.5%. This concession has been a cornerstone of investment planning for individual investors, family trusts and business owners across Australia for many years.

It has also, over time, shaped asset allocation behaviour. Growth-oriented assets, including equities, direct property and business ownership, have benefited structurally from this framework relative to income-producing assets, where returns are assessed in full at the investor's marginal rate in the year they are received.

What the Budget Has Proposed

The proposed changes remove the 50% CGT discount and replace it with a minimum 30% tax on capital gains, alongside new indexing measures intended to account for inflation on the cost base of assets. The net result is a meaningfully higher effective tax rate on long-term capital gains for most investors.

The changes also affect how trust structures are taxed. A proposed 30% flat tax on trust income, combined with changes to franking credit treatment when income is distributed from a trust to a related company, adds further complexity for investors who hold assets through discretionary trusts, a structure commonly used by high-net-worth families in Australia.

It is important to note that these measures are not yet law. They were announced as part of the budget and will need to pass through the legislative process. Industry bodies and advisors have raised a number of questions about the detail, and the final form of the legislation may differ from what was announced. Investors should seek independent tax advice before making any structural decisions based on the current proposals.

Income-producing investments are assessed on the income side of the tax ledger. The treatment of that income has not changed under the proposed measures.

Why Income-Producing Investments Are Different

This distinction is fundamental and worth explaining clearly. The capital gains tax regime applies specifically to the capital account, meaning gains arising from the disposal of assets. Income-producing investments, by contrast, generate returns that sit on the income account: interest, distributions and yield payments that are assessed as ordinary income in the year they are received.

Private credit is one such asset class. Returns are generated through interest on loans, not through the appreciation and eventual sale of an underlying asset. Those returns have always been assessed on the income side of the ledger, and the proposed budget changes do not alter that treatment in any way.

As the differential between the taxation of capital gains and income narrows under the proposed changes, investors and advisers may reassess the relative after-tax outcomes associated with different sources of return.

The Portfolio Allocation Implications

For investors and their advisors, this creates a natural prompt to review how portfolios are constructed and where returns are being sourced from. A portfolio that has historically been weighted toward capital growth assets, in part because of their tax efficiency, may look different when that efficiency is reduced.

Income-producing assets are often considered by investors alongside a range of factors including income generation, diversification and broader portfolio objectives. Changes to the taxation of capital gains may alter the relative after-tax outcomes associated with different sources of return.

This does not mean growth assets no longer have a place. Diversification across return types remains a sound principle. For investors who are in or approaching the distribution phase of their investment journey, or those focused on preserving and growing wealth rather than pursuing maximum capital appreciation, the balance between capital growth and income generation may warrant renewed consideration.

What We Are Observing

In our recent discussions with investors and advisors, we have observed increased interest in understanding how different return sources may be affected under the proposed framework and how income-generating assets fit within broader portfolios.

Much of the investor community is, understandably, waiting for legislative certainty before making significant structural changes. However, many advisors are already considering various scenarios and modelling the potential implications for their clients.

Private credit generates returns primarily through interest income rather than capital appreciation. As with any investment, outcomes are influenced by a range of factors, including borrower performance, economic conditions and credit risk. Investors and advisers considering the implications of the proposed tax changes may wish to evaluate how different return sources align with broader portfolio objectives and individual circumstances.

A Note on Uncertainty and What Comes Next

The proposed measures are not yet legislated. The budget announcement provided high-level direction but not the granular legislative detail that advisors and investors need to make fully informed decisions. Industry consultation is ongoing, and there is a reasonable prospect that amendments will be made before the final legislation is passed.

For investors, this means that while it is sensible to begin thinking through the implications now, major structural decisions, particularly around restructuring trusts, changing ownership entities or significant portfolio rebalancing, should be made in consultation with qualified legal and tax advisors once the final legislation is available.

We will continue to monitor developments and share updates as the legislative position becomes clearer.

Summary

The proposed CGT changes represent a meaningful shift in the after-tax return profile of capital account assets in Australia. The proposed measures do not directly alter the taxation of income returns. As a result, the implications for investors whose portfolios are focused on income-producing assets may differ from those for investors whose returns are primarily derived from capital gains.

The indirect implications may be more nuanced, as changes to the taxation of capital gains could alter the relative after-tax outcomes associated with different sources of return.

For investors considering how these developments may affect their own circumstances, we encourage discussion with a financial advisor and, where relevant, qualified tax and legal advisers who can assess the implications in light of individual objectives and circumstances.