CGT tax changes may encourage investors into ASX dividend shares: Expert

Private wealth and investment advisory firm, Medallion Financial Group says changes to capital gains tax (CGT) will likely encourage investors to focus on income-generating assets like ASX dividend shares over growth investments.

Under the changes announced in the Federal Budget on Tuesday, the 50% CGT discount for assets held longer than 12 months will be replaced by a cost base indexation method from 1 July next year.

This method adjusts the cost base of an asset for inflation.

Existing investments will be grandfathered, so the 50% CGT discount will continue to apply to gains before 1 July 2027.

Capital gains on existing investments on or after 1 July 2027 will be subject to cost base indexation.

A minimum 30% tax on net capital gains will apply under the cost base indexation method.

There is one exception.

To maintain incentives for new housing supply, investors in new residential properties will be able to choose either the 50% CGT discount, or cost base indexation and the minimum 30% tax rate.

In a newsletter this week, Medallion outlined its predictions as to how the tax changes might influence investor behaviour.

The advisory firm said:

By increasing the effective tax burden on capital gains, the government has altered the relative attractiveness of growth versus income subtly, but meaningfully shifting investor behaviour.

At a high level, the changes tilt the playing field toward yield. If a larger portion of capital gains is taxed away, the after-tax return profile of growth assets; equities, start-ups, and expansionary investments becomes less compelling.

In contrast, income streams such as dividends retain their relative appeal, particularly where they are franked.

ASX dividends shares and franking

Dividends are typically funded from profits, and franking credits represent the tax a company has already paid on its profits in Australia.

People invested in ASX dividend shares receive both the raw dividend plus the level of franking relevant for each company they own.

The level of franking depends on how much corporate tax the company has paid and has available in its franking account.

At tax time, franking is credited towards an investors’ tax payable, reducing tax on their dividend income and preventing double taxation of profits.

For example, Commonwealth Bank of Australia (ASX: CBA) is among the most popular ASX dividend shares on the market.

CBA shares typically pay dividends with 100% franking.

For 1H FY26, CBA declared a dividend of $2.35 per share plus 100% franking.

Therefore, an investor who owned 100 shares in CBA would have received a $235 dividend and a $100.71 franking credit.

‘A likely rotation in capital’

Medallion says the tax changes will likely encourage a rotation in capital away from growth assets to income assets.

Investors may increasingly favour high-dividend, lower-volatility sectors over innovative, higher-risk areas of the market.

In effect, policy is nudging capital away from forward-looking, productivity-enhancing investments and toward more defensive, domestically oriented exposures.

One of the reasons ASX shares are a popular investment is because the dividend yield is much higher than international shares.

The long-term average annual yield for ASX 200 shares is 4% to 4.5%, however, this has fallen closer to 3.5% in recent years.

By comparison, the current trailing dividend yield on US shares or S&P 500 Index (SP: .INX) stocks is 1.1%.

A high dividend yield provides protection for investors when the market falls, as it has in 2026.

In the calendar year to date, the S&P/ASX 200 Index (ASX: XJO) is down 1.1%, however, investors have still received dividends.

Other popular dividend shares

ASX 200 bank and mining stocks have long been viewed as among the most generous ASX dividend shares.

For example, ANZ Group Holdings Ltd (ASX: ANZ) shares are currently trading on a trailing dividend yield 4.76%.

Westpac Banking Corp (ASX: WBC) shares are trading on a trailing yield of 4.31%.

Fortescue Ltd (ASX: FMG) shares have a trailing dividend yield of 5.3%.

Outside of the banks and miners, other strong ASX dividend shares include the energy giants, telcos, and utilities shares.

Woodside Energy Group Ltd (ASX: WDS) shares are trading on a trailing dividend yield of 5.39%.

Telstra Group Ltd (ASX: TLS) shares have a trailing yield of 3.75%.

ASX 200 utilities stock, APA Group Ltd (ASX: APA), has a trailing dividend yield of 5.39%.

The post CGT tax changes may encourage investors into ASX dividend shares: Expert appeared first on The Motley Fool Australia.

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Motley Fool contributor Bronwyn Allen has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has positions in and has recommended Apa Group and Telstra Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.