Feel like you’ve read enough Budget coverage already? I hear you.
Haven’t read any? I hear you, too.
Me? I’ve spent the last 24 hours deep in the weeds. Partly because it’s my job, and partly because I’m just a finance and politics nerd. And that makes Budget day Nerd Christmas!
So, welcome to Budget Boxing Day.
I say “welcome,” but obviously we’re well into the day-after-the-Budget. Plenty of “hot takes” have emerged since the Treasurer rose to speak in Parliament House at 7.30pm Canberra time, yesterday.
But, I wanted to let the dust settle. Given the choice between being “fast” and being “considered,” our long-standing approach at The Motley Fool is not to try to outrun others (a losing bet), but rather to use the extra time to properly analyse the situation and refine our views.
And while I write in this space every year providing my perspective on the Budget and its implications for investors, the answer is usually “not much.” Typically, there are a few tweaks to programs or some specific spending here and there that might impact one company or maybe a whole sector. This year’s Budget is notably different, though, because the centrepiece is a change in tax treatment for investors â primarily in housing, but also in shares and other assets.
I hope you’ll find the following (short) analysis valuable and relevant. I’ll cover the big picture, then dive into specific areas with potential implications for how we allocate capital to maximise the long-term value of our portfolios.
The good news is that the Government is delivering a Budget with a smaller deficit over the next five years than previously forecast. It is not low enough in my view; I would prefer to see a structurally-balanced budget with meaningful debt repayments if the Government is serious about the national fiscal position and the impact on inflation and interest rates.Â
Nevertheless, this result is better than previously forecast and much better than it could have been following policy changes announced last night.
There are several other positives. Yes, there is a small amount of money coming our way in a couple of years’ time, but I think I can say â without being accused of partisanship â that this is largely just a standard “giveaway” announcement every Treasurer tries to include on Budget night and isn’t particularly consequential⦠particularly given how long we’ll have to wait for the money.
More realistically, there was a positive announcement for small business: the Government is making the instant asset tax write-off permanent rather than it being a rolling year-to-year proposition. There are also a handful of relatively small but important improvements to paperwork and administration. This is the “boring but important” work of productivity that every government should engage in, and it was good to see.
At a national level, there was good news for potential first-home buyers regarding tax treatment, but also some related drawbacks for asset owners. The three major revenue-raising components of the Budget were changes to negative gearing, capital gains taxation, and the taxation of trusts.
Let’s address trusts first. The Government has decided to tax discretionary trusts at a minimum of 30% to prevent them from being used primarily as income-splitting tools. Opinions on whether this is legitimate will differ based on ideology. If these trusts are used primarily to minimise tax, I struggle to criticise the change, but the devil is always in the detail; we will see more in the coming weeks.
Now to negative gearing.
For residential properties purchased after 7.30pm last night, negative gearing will only be allowed until 30 June 2026. The only exception is the construction of new homes, which will still attract negative gearing benefitsâa clear attempt by the Government to focus dollars on creating more dwellings. It will also be ‘grandfathered’: it will remain in place for all residential property already owned.
I support this approach on a national interest level. Most would agree that having more owner-occupiers is a worthy societal goal. Tilting the playing field away from investors and toward first-home buyers is sound policy, particularly as it is grandfathered and doesn’t hurt existing owners.
While removing negative gearing may increase rents in the short term, I think the long-term benefit is worth the risk. As a society, we must accept that worthy policy changes sometimes have winners and losers. (Radical, right? It never used to be, but that’s politics these days.)
Now to CGT: the Government announced that the taxation of capital gains will no longer attract a 50% discount but will return to the indexation method used prior to 1999. This applies to all assets, including shares.
As unpopular as this might be among investors (because it will mean a higher tax bill for some), I have long argued for a return to indexation for two reasons. First, from a first-principles perspective, there was no policy justification for an arbitrary 50% discount. Indexation ensures tax is levied at the taxpayer’s marginal rate only after allowing for inflation, which clearly should not be taxed.
Second, I cannot personally justify a wage-earner paying tax at twice the rate levied on capital gains. I say this as both an investor and someone who works for a wage. While many argue that investing should be encouraged because it creates productivity and prosperity, I am not convinced those arguments outweigh the case for indexation.
(By the way, I assume you know this by now, but I’m not here to lobby only for the interest of shareholders, despite my job. I am (thankfully) allowed free rein by The Motley Fool to put national- above self-interest when I write these pieces. But also, as I’ve mentioned before, if I was going to create a set of policies to maximise by portfolio returns, I’d focus on designing the most prosperous economy I could⦠that’s the best way for quality companies to truly thrive over the long term! So, I know some readers may be worse off in the near term under the new system, but I think the country will be better off. I hope you’ll agree with me that that’s the bigger objective, here, even if you disagree with my views on the specifics.)
I will also say I think the ‘minimum 30% tax rate on capital gains’ is a terrible idea. I get that it’s probably targeted at income splitting and tax minimisation, but the unintended victims will be those trying to live off capital sales, who will pay at least 30% from the first and every subsequent dollar earned, while someone earning a wage gets a very generous tax-free threshold before they pay a dollar of tax.
Okay, so what do the CGT changes mean for investors, when it comes to choosing how to structure their portfolios, and what companies to put in them? Directionally, it’s a change. However, for the investor buying quality businesses, it probably won’t change much over the long term.
Let’s break it down:
Essentially, if your rate of return is more than double the rate of inflation, you would have been better off under the old system. If your rate of return is less than double the inflation rate, you will actually benefit under the new system. But remember â and this is important when doing the maths â the rate of return we’re talking about is capital growth only; dividends will continue to be taxed as income, often with franking credits attached.
So, an investor might be tempted to lengthen their holding period or shift toward dividend-paying shares. However, it would be a mistake to uproot your entire strategy.
Why? Here’s the framework: The goal is not to minimise tax, but to maximise your after-tax return.
If you could double your money in two years with a particular company, it would be silly to give that up for an average company with a slightly higher dividend yield. If you thought they were close-run things, though, you might prefer the tax-advantaged fully-franked yield.
So it changes the margins, but not the bullseye.
I fully expect that investing remains a highly profitable pursuit. The productive capacity and ingenuity of Australian and international businesses remain as impressive as ever. If you are against these changes, that’s okay, but please don’t throw your toys out of the cot. The future for Australian investing is still bright.
I am not changing my portfolio at all as a result of yesterday’s announcement. I believe the businesses I own and recommend remain attractive long-term wealth creation opportunities.Â
Taxes have changed in the past and will change again. The market has never failed to regain and surpass a previous high, regardless of the tax arrangements.
Feel free to have your view on these policies and express it to your local MP or Senator. But please, don’t stop investing. Under both the old and new tax regimes, I am confident that the future remains bright.Â
Fool on!Â
The post What Budget 2026 means for investors appeared first on The Motley Fool Australia.
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