Wilson Asset Management says proposed changes to capital gains tax (CGT) will encourage investors into higher-yielding assets.
In the share market, that means ASX dividend shares, especially those that offer high franking, over ASX growth shares.
Under the changes announced in the Federal Budget, the 50% CGT discount for assets held longer than 12 months will be replaced by a cost base inflation indexation method from 1 July next year, and a minimum 30% CGT rate will apply.
While existing investments will be grandfathered, so the 50% CGT discount will continue to apply to gains before 1 July 2027, the rules change after that date.
That means existing investors will pay CGT based on two sets of calculations: pre-1 July 2027 gains using the 50% discount, and post-1 July 2027 gains using the inflation-indexed method.
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Wilson Asset Management's view
Wilson advocated for keeping the CGT discount for ASX shares and all other assets except investment property.
In a submission to a Senate enquiry, Wilson explained that "capital flows toward the highest after-tax risk-adjusted return".
'After-tax' is the key term there.
Wilson said retail investors were likely to gravitate toward higher-yielding assets offering passive income if they have to pay more CGT.
The fundie said:
By increasing the tax burden on long-term capital gains while leaving income-producing assets comparatively more attractive, the Bills will, over time, redirect Australian savings away from growth companies, founders, venture capital and productive enterprise, and toward yield-producing assets that generate income.
Wilson manages about $6 billion for 130,000 Australian investors who own shares in its ASX listed investment companies (LICs).
Those LICs include WAM Capital Ltd (ASX: WAM), WAM Leaders Ltd (ASX: WLE), and WAM Research Limited (ASX: WAX).
Wilson said the changes would discourage investment, entrepreneurship, and economic growth, and "alter investor behaviour".
Capital will increasingly favour mature yield-producing assets rather than growth-oriented investments whose returns are realised predominantly through future capital appreciation.
Currently many of Australia's most successful businesses generate limited income in their formative years.
Investors accept risk in exchange for the prospect of long-term capital growth. The proposed tax changes reduce that outcome.
The consequence of this will be a gradual reallocation of capital … toward assets producing immediate taxable income.
Chairman and Chief Investment Officer of Wilson Asset Management, Geoff Wilson AO, also appeared before the committee.
In his speech, Wilson said:
Australia's prosperity has always depended on a simple idea: that if people work hard, save carefully and take considered risks with their capital, they can build a better future for themselves and their families.
We believe this legislation weakens that social contract.
ASX dividend shares will become more appealing: experts
Wilson Asset Management is among many professional managers who say the proposed CGT tax changes will encourage investors to pursue ASX dividend shares over ASX growth shares.
Wealth and investment advisory firm Medallion says:
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.
Market Partners analysts James Gerrish and Shawn Hickman said income investments were already more appealing in today's economic environment.
In a webinar presentation, they said:
Sticky inflation, higher rates and geopolitical uncertainty all increase the value of tangible cash flow today.
So, when the proposed CGT changes are added on top, they concluded:
Growth still has a role, but strategies that rely heavily on after-tax capital gains look relatively less attractive.
