Since the federal budget was delivered the Treasurer and Prime Minister have announced a number of changes to a) try to quell the swell of negativity and b) appease the anti-investment instincts of the Greens in the Senate.
That is not to say that there will not be more changes before it all becomes law. So, the wise investor would not take action before all changes are finalised. And only then after taking professional advice.
The good news is that some of the more alarming post-budget headlines have proven to be overstated. The government has introduced a number of carve-outs, exemptions and provided transitional arrangements.
An important story, however, is not the individual tax measures themselves. It is the government’s attempt to redirect, somewhat, investment capital.
Simply put, the government wants to encourage capital towards new housing, active businesses and superannuation, while reducing some of the long-standing tax advantages associated with established residential property and discretionary trust structures. It’s not a coincidence that some $77bn in additional tax is being raised over ‘the forward estimates’.
For investors, the key question is therefore not simply “What has changed?” but rather “How should I respond?”
Capital Gains Tax: A Big Shift
Much of the public debate has focused on proposed changes to the capital gains tax (CGT) regime.
Under the current system, individuals and trusts generally receive a 50% discount on capital gains realised (before added to their taxable income) after holding an asset for at least 12 months. The Government proposes replacing this with an inflation indexation model from 1 July 2027.
The initial announcement generated considerable concern, to put it mildly. However, the transitional provisions and the ‘carve-outs’ have moderated the effects, if only slightly. For example:
- Capital gains accrued before 1 July 2027 are expected to retain their existing treatment. This transitional protection means investors have time to review portfolios and consider future asset-sale strategies.
- Small business CGT concessions remain available and some aspects have been expanded through higher thresholds. For many business owners and family groups, this preserves one of the most valuable concessions in the tax system.
The essential matter is that CGT is not disappearing as a wealth management consideration. Rather, investors will need to become more deliberate about when and where gains are realised. Professional advice will be required.
Property Investment: Incentives Are Being Redirected
The proposed negative gearing changes reflect a shift in policy direction, with the aim of making residential home ownership easier.
Investors purchasing established residential properties after the commencement date will generally be unable to offset rental losses against salary and wage income. Instead, losses would be carried forward for use against future rental property income.
Existing residential property investments are expected to be grandfathered.
At the same time, newly constructed residential properties continue to receive preferential treatment under both the negative gearing and CGT proposals.
This reflects the government’s drive to redirect investment capital away from established housing stock and towards new housing supply.
Whether that objective is achieved remains to be seen, but investors should recognise that future property investment decisions may increasingly be influenced by these differing tax outcomes. Professional advice will be required.
Family Trusts: Tax Benefits Reduced, Strategic Value Remains
Family trusts have long been valued for their ability to distribute income flexibly among family members.
The proposed introduction of a minimum 30% tax rate on discretionary trust income would reduce some of those traditional income-splitting benefits, particularly for higher-income family groups.
However, one of the most significant post-Budget concessions relates to testamentary discretionary trusts.
Following strong opposition from professional bodies and estate-planning advisers, not to mention the media outcry, the Government agreed that the proposed 30% minimum tax would not apply to testamentary trusts established through a deceased estate.
This exemption preserves an important estate-planning vehicle and acknowledges that testamentary trusts serve a fundamentally different purpose from normal family trusts established during a person’s lifetime.
For many investors, the conversation around trusts may therefore shift. Rather than focusing solely on tax minimisation, greater emphasis may be placed on asset protection, succession planning and intergenerational wealth transfer. Professional advice will be required.
SMSFs: Relative Attractiveness May Increase
Compared with other investment structures, SMSFs have emerged from the reform process largely intact.
While separate measures, such as Division 296 tax (the extra tax on superannuation accounts larger than $3m), remain relevant and possibly very painful for individuals with very large superannuation balances, SMSFs have generally avoided the most controversial elements of the Budget reforms.
This may prove significant.
Tax policy rarely operates in isolation. When concessions are reduced in one area of the system but retained in another, capital tends to migrate towards the more favourable environment.
For some investors, superannuation may therefore become relatively more attractive as a long-term wealth accumulation vehicle. Professional advice will be required.
Strategic Considerations for Investors
Rather than reacting to headlines, First Samuel suggests that investors may wish to consider a number of practical questions:
- Does the current investment structure still achieve the desired balance between tax efficiency, asset protection and succession planning?
- Should future property acquisitions favour new residential developments over established housing?
- Has the relative attractiveness of superannuation increased?
- Are testamentary trust provisions appropriately incorporated into estate-planning arrangements?
- Most importantly, are investment decisions being driven by long-term after-tax returns rather than individual tax measures?
The Bottom Line
The post-Budget reforms are certainly a broad-based attack on investors, that the government has presented as a recalibration of incentives.
For investors and family groups, the opportunity lies not in reacting to policy announcements but in understanding how those policy settings may influence future capital allocation decisions.
If you interested in discussing your individual circumstances and how we can help, book and obligation free consultation today.
The information in this article is of a general nature and does not take into consideration your personal objectives, financial situation or needs. Before acting on any of this information, you should consider whether it is appropriate for your personal circumstances and seek personal financial advice.