Look, I’m not terribly happy about the Capital Gains Tax (CGT) changes proposed in the Budget last week. Like most of you, I feel I already pay more than enough tax.
Nor has any recent iteration of the Federal Government convinced me it spends our tax dollars particularly well. Take the giant hydroelectric “battery” known as Snowy 2.0. Conceived on a coaster in a Cooma pub in 2017, where it should have been swept away at closing time. It was originally slated for completion by 2021 at a cost of $2 billion (lol). The latest schedule says 2030, with a projected cost of $42 billion. Who knows where it ends?
There are roughly 15 million employed taxpayers in Australia. Spread across them, $42 billion works out to about $2,800 each, or $5,600 for a two-adult household. If you work full time and enjoy reading financial blogs, my guess is your share of the bill will be higher. A lot of money for just this one largely-predictable mistake.
Then there’s Inland Rail, long planned to connect Melbourne and Brisbane via inland NSW. It’s now likely to connect Melbourne only to Parkes after the original budget blew out several times over. And it’ll still cost your family a modest holiday’s worth of dollars.
And it’s impossible not to mention the NDIS. Around $50 billion every single year and, until recently, growing at such a pace that it would theoretically have overtaken the entire Australian economy within a few decades. I know deserving recipients who describe it as life changing, and who am I to deny them needed support? But how much needless fraud and waste has occurred under the watch of successive governments? Lax systems, lax oversight, and we’re the ones footing the bill.
All of which is to say: surely there is far more that can and should be done on the cost and efficiency side of the ledger.
I share the concerns about paying more into a system that already struggles to deliver value for money. I also agree with those calling BS on politicians trying to package these changes as a housing affordability measure.
And I have particular concerns about the proposed system’s impact on business formation. Especially the high-risk, high-return entrepreneurial ventures that, given the right nurturing, create the champion businesses of the future. You know, the ones we’ll need for jobs growth and a broader tax base.
With that out of the way, much of the commentary surrounding the proposed CGT changes has focused on extreme outcomes rather than typical ones.
The changes are meaningful, but they will affect different situations very differently — and not always negatively. Outcomes vary enormously depending on the type of investor, the structure they invest through, and the nature of the returns they generate.
Mixed bag
The biggest losers are clearly those pursuing genuinely high-return outcomes over long periods of time. That includes entrepreneurs building successful businesses from scratch, early-stage investors backing riskier ventures, and growth-oriented investors hoping to compound capital materially faster than inflation.
And, yes, that will include many of Forager’s investors, perhaps even you. It also includes me. If you generate good (or better) long-term capital gains, your eventual tax bill is likely to rise significantly under the proposed regime. There’s little point pretending otherwise.
But it’s also worth recognising that most long-run investment returns are not purely capital gains. In Australia especially, a substantial proportion of total equity returns has historically come from dividend income, which continues to receive relatively favourable treatment and is largely unaffected by these proposed changes.
Inflation matters too.
One underappreciated feature of the proposed regime is that it restores the principle that investors should pay tax primarily on real gains rather than purely nominal ones. Under the current system, investors often pay capital gains tax even where much of the “gain” simply reflects inflation over time.
I’ve long argued that the 1999 CGT changes created a particularly harsh outcome for more conservative investors willing to accept lower returns. Assets compounding at or below the inflation rate can generate meaningful tax bills under the current regime despite little or no real wealth creation. That wasn’t the case prior to 1999.
Under the proposed system, those investors will likely end up better off.
In fact, investors can even outperform inflation modestly and still be better off under the proposed rules.
A lukewarm example
To illustrate, take the past 10 years of returns from the iShares Core S&P/ASX 200 ETF, a widely held ETF providing exposure to a broad portfolio of Australian businesses. Over the decade to 30 April 2026, it returned 9.21% per annum — broadly in line with long-run equity return expectations.
Of that 9.21%, 4.70% came from capital growth, with the remaining 4.51% from distributions. Most of those distributions ultimately reflect dividends paid by the underlying companies. Australian dividends already receive relatively favourable tax treatment through franking credits and are unaffected by the proposed changes.
Now consider the tax implications of that 4.70% annual capital growth, assuming the investment was held for a decade and then sold. Over the period, a $10,000 investment would have grown to approximately $15,545. Under the current regime, where investors receive a 50% CGT discount on assets held longer than 12 months, an investor on the top marginal tax rate (currently 45%) would pay tax on half of the $5,545 gain — implying tax payable of roughly $1,248.
What about under the proposed system? Over the same decade, CPI inflation averaged a little above 2.8% per annum. Under the proposed inflation-adjusted approach, the investor’s original $10,000 cost base would rise to approximately $13,250 in nominal terms. Their taxable “real” gain falls to roughly $2,295, producing tax payable of around $1,033.
So, in the case of a relatively ordinary ASX 200 investor over the past decade, you might actually have preferred the proposed system to the current one. I haven’t seen much discussion of that possibility over the past week.
Structure matters
Some investors will pay substantially more tax under the proposed system. Others may pay less. Much depends on the relationship between investment returns and inflation over long periods.
It’s also worth remembering that tax-advantaged avenues for long-term investors still exist. Relatively-speaking, their advantages have just become even more valuable.
The proposed changes do not apply to superannuation structures, including Self Managed Super Funds. The ability to compound investment returns within a concessional tax environment still matters enormously, especially over multi-decade horizons. The structure through which we invest will become even more important if these CGT changes proceed. Before someone points out that the government will one day change super rules too, it is a risk and concern I share.
None of this is to say I support higher taxes. I don’t, particularly in an environment of entrenched government waste. Nor do I think Australia should discourage entrepreneurial risk-taking. We need more ambitious business builders and more investors willing to back them, and this regime is likely, ultimately, to produce fewer of both.
For investors generating good-to-exceptional long-term returns, the changes will hurt. For more conservative or unlucky investors, the impact will be far smaller than many fear, and in many cases beneficial.
Either way, my broader gut feel remains unchanged: Australia has more of a spending problem than a revenue problem. There’s so much low hanging fruit on the cost side, and a complete unwillingness to go after it. It would be nice to see governments confront that reality head on rather than increasingly lean on investors to solve the problems of their own making. In that respect, the frustration expressed over the past week is entirely understandable.