Labor’s tax reforms, primarily aimed at investment properties, also affect other assets, including shares. This has prompted concerns that the changes in the budget may impede young Australians’ efforts to build wealth for financial goals like a house deposit through an equity portfolio.
How are shares affected by the budget?
Labor’s changes to negative gearing are specifically targeted at residential property, leaving other asset classes, such as shares, unchanged. But the new capital gains tax (CGT) rules will apply to all CGT assets, including equities. Under the changes, from 1 July 2027, the 50% CGT discount will be replaced by a system known as cost-base indexation, covering a variety of investment assets held for more than 12 months. If shares are bought on or after 1 July 2027, they will be subject to the new rules, which take into account inflation before working out the capital gain applied to an investor’s taxable income. Shares held before that date and sold after will be subject to transitional rules using both methodologies.
Are the changes bad for my share portfolio?
The CGT calculations vary according to inflation rates, equity returns, and a person’s income tax rate. In general, an investor will probably be worse off under the new system if their shares have surged in value, but potentially pay less tax if stock performance has been modest. Investors retain the ability to negatively gear their portfolios, limiting fallout. Negative gearing a share portfolio involves borrowing money to buy stocks where loan interest exceeds dividend income, allowing a tax deduction. The reforms mean tax payable on profits won’t drop below 30%, with few exceptions, closing a loophole that allowed lower tax if sales coincided with low-income periods.
Will home ownership become harder for young Australians?
The tax changes protect existing arrangements for those with accumulated wealth, as noted by shadow treasurer Tim Wilson. However, the tax system, along with a severe housing undersupply, has fueled decades of worsening inequity. House prices have risen over 400% since 1999, more than double wage growth, creating an affordability crunch. Younger generations are in a bind because saving for a deposit is often insufficient, prompting many to invest in shares or cryptocurrency to bridge the gap. On their own, Labor’s reforms might slightly diminish the appeal of share trading. At the same time, home ownership will become slightly more attainable because investors won’t have such an advantage over prospective owner-occupiers. This means younger Australians using investments like shares to obtain a deposit will, overall, be better off. As Sydney-based financial adviser Andy Darroch from Independent Wealth Advice says: “Whatever you lose in the new tax framework from your shares, you’ll more than gain back because the house you are after will be slightly cheaper than it would have been under the old system. Yes, the medicine of investing to get a deposit is slightly less effective, but the disease of unaffordable housing is not quite as bad.”
