Australian Tax Overhaul Hits Property, Spurs Shift to ETFs and LICs

The technical change makes direct share portfolios less attractive for stocks that have risen less than inflation. Under the old system, the 50% discount applied to nominal gains. Now, if a stock has risen 4% over two years while inflation ran at 6%, the investor faces a tax on a nominal gain that is actually a real loss. ETFs and LICs handle this more efficiently because gains and losses are netted internally, the analysis explains. Australian Foundation Investment Co (ASX: AFI) is one example of a listed investment company that benefits from this structure. The internal netting makes pooled vehicles a better fit for the new regime.

Superannuation funds retain a more favorable treatment. Capital gains in super are taxed at 10% for assets held more than a year, and fall to effectively zero when the fund moves to pension mode. The analysis suggests this could lead to a split in strategy: super funds continue to target capital gains, while personal portfolios shift toward dividend income using ETFs or LICs.

The government has proposed an exclusion for start-ups, allowing founders and investors to keep the 50% CGT discount with some caveats. The details remain unclear, the analysis notes. Exactly how the 'innovation' exclusion will work and which companies qualify is still uncertain.

The property crackdown may also push money into listed alternatives. Commercial property is not covered by the negative gearing prohibition. REITs and ETFs holding commercial property offer diversification and liquidity that direct property lacks. Negatively gearing a share portfolio could also become more common, the analysis says.

The new CGT rules take effect from the start of the next financial year. The innovation exclusion details are expected to be clarified before then. Until then, the uncertainty around the exclusion and the broader tax changes will continue to influence investor behavior.