“A real sting in the tail” - The rules of investing have been rewritten (plus 5 key charts)

The investing playbook Australians followed for a generation has just been torn up.

The Labor Government’s sweeping tax overhaul targets capital gains, property and trust structures in the name of generational equality, with wealthy retirees and trust-heavy investors among the biggest losers - while potentially triggering a major reallocation of capital across the economy.

In this wire, I share perspectives from some of Australia’s most renowned experts on tax, super and investing structures about what the changes are and how they will impact you.

The facts

As foreshadowed on Livewire in recent weeks, the Government unveiled three major tax changes that collectively represent one of the biggest shake-ups to investing structures in decades. Please read till the end - I have included some very interesting charts the government used to frame its rationale for these changes.

Key change # 1 - Capital gains tax

The Government will replace the 50% Capital Gains Tax (CGT) discount with a discount based on inflation and introduce a minimum 30% tax on gains from 1 July 2027.

According to the Government, the reforms are designed to ensure investors “only pay tax on their real capital gain”, restoring the original intent of the CGT regime.

The new rules will only apply to gains arising after 1 July 2027.

Importantly, investors in new builds will be able to choose between the existing 50% CGT discount or the new indexation-style arrangements.

Key change #2 - Negative gearing

The Government will limit negative gearing to new builds from 1 July 2027, arguing the changes will direct tax support toward increasing housing supply.

Existing arrangements will remain unchanged for all properties held before Budget night.

Investors who purchase new builds will still be able to deduct losses against other income.

However, investors who buy established residential properties after Budget night will only be able to deduct losses against residential property income. Unused losses may be carried forward to future years but cannot be offset against wages or salary income.

Key change #3 - Discretionary trusts

The Government will introduce a minimum 30% tax on discretionary trusts from 1 July 2028, with limited exceptions.

To soften the transition, rollover relief will be provided for three years from 1 July 2027 to assist small businesses and investors wishing to restructure.

Wealthy Boomers to feel the burn

While much of the public debate has centred around replacing the 50% CGT discount with an inflation-indexed system, Peter Bembrick, Partner in Taxation Services at HLB Mann Judd, says the more consequential issue is the introduction of a proposed 30% minimum tax rate on capital gains realised through trusts.

“While the headlines will focus on replacing the 50% discount on future capital gains with a return to cost base indexation, the real sting in the tail for retirees comes from the 30% minimum tax rate,” Bembrick says.

That creates a deeply unusual outcome.

Some investors - particularly those already paying high marginal tax rates - may not necessarily be dramatically worse off under the new system. In some cases, indexed cost bases may even lower taxable gains depending on holding periods and asset performance.

But retirees are a different story.

“The real losers from the changes will be retirees who have been high taxpayers their whole working lives and realise capital gains at a time when their marginal tax rate may be as low as 15%, effectively doubling the CGT payable."

While the effect will be minimised in the short term by the grandfathering arrangements - (a choice between market value cost base reset or time-based apportionment) - after a few years "a much higher proportion of an investor’s capital gains will be represented by post-1 July 2027 growth."

"Effective tax rate of up to 60%"

Trusts have long been one of Australia’s most widely used investment structures because of their flexibility and ability to distribute income tax-effectively across family groups.

But the proposed rules appear specifically designed to discourage one of the most common strategies: distributions to corporate beneficiaries.

“There appears to be a deliberate policy intent to discourage distributions to corporate beneficiaries which would suffer an effective tax rate of up to 60%,” Bembrick says.

The changes may also create a substantial administrative burden.

“Not only does this proposal increase the overall tax payable by trust beneficiaries, but the proposal will also add an extra administration burden on taxpayers and the ATO through hundreds of thousands of extra assessments and greater complexity for trust beneficiaries,” he says.

Case study of higher taxes

Bembrick provided a real-world example illustrating just how severe the proposed trust changes could become for ordinary family structures.

“The A Family Trust has taxable income of $200,000 in FY29.

It distributes 50% each to Mr A (salary $210,000 and a marginal tax rate including Medicare Levy of 47%), and Mrs A (no other income).

Mr A’s net tax payable will be unchanged, being a gross tax liability of $47,000 less a tax offset of $30,000 (tax paid by the trustee) = $17,000 payable on assessment and total tax of $47,000 on the trust distribution.

However Mrs A has a tax liability of just over $22,000 on her $100,000 trust distribution. While under the new rules she could claim a tax offset of $22,000, reducing her tax on assessment to Nil, she doesn’t get the remaining $8,000 and her overall tax liability is $30,000 (i.e. 30% minimum rate).

Even worse, say the trustee distributes $100,000 to an investment company B Pty Limited instead of Mrs A, thinking the tax rate is 30% anyway.

Unfortunately B will not receive the tax offset and will pay another 30%, total tax of $60,000.

Knowing how the rules work the trustee would not do this, and is effectively forced to distribute only to individuals.”

Ironically, Bembrick believes the reforms may simply push investors toward different structures altogether.

“When combined with the CGT discount changes, it is likely that many taxpayers will be pushed further towards using investment companies instead of trusts,” he says.

Long-term Australia equity investors may benefit

One of the more surprising reactions to the Budget came from Conrad Francis, Founding Director at Inspired Money, who argues the reforms may not be nearly as negative for long-term share investors as many assume.

In fact, his modelling suggests inflation indexation would have historically produced a better outcome than the 50% CGT discount for long-term ASX investors more often than not.

Using rolling 10-year holding periods on the ASX 200 between 2011 and 2026, Francis found indexation beat the 50% discount roughly 70% of the time.

“I ran the numbers on the same tax rule across two asset classes,” Francis says.

“ASX 200 investors holding 10+ years would have been better off under inflation indexation 70% of the time. Capital city property investors would have been better off under the 50% discount 79% of the time. Same rule. Opposite outcomes.”

Francis argues the old system treated vastly different assets too similarly.

“The 50% discount was a blunt instrument trying to do one job across very different assets,” he says.

In his view, the reforms are effectively a return to Paul Keating’s original inflation indexation framework, which existed before Peter Costello introduced the 50% CGT discount in 1999.

Importantly, Francis does not believe the changes solve Australia’s housing supply problems, but he argues they may finally begin differentiating between productive investment and speculative housing demand.

“The discount wasn’t building a share-owning democracy, it was distorting capital into existing houses.”

Property may no longer dominate the Australian dream

Indeed, Blake Cullen, Senior Financial Adviser at Evalesco, believes the bigger story is what happens next.

“The most significant shift won't be in the policy itself, it will be in investor behaviour,” Cullen says.

In his view, the Government may have unintentionally triggered one of the biggest reallocations of household capital Australia has seen in decades.

For generations, Australians followed a relatively straightforward path to wealth creation: buy property, negatively gear it, hold it for the long term, and use trusts to distribute income efficiently across the family.

That model is now under pressure from every angle.

“With the tax advantages attached to established residential property now materially reduced, I'd expect younger investors to place less emphasis on bricks and mortar as the default path to wealth creation,” Cullen says.

Instead, Cullen believes money may increasingly flow toward equities and superannuation structures, which now offer comparatively greater flexibility and tax efficiency under the new rules.

“Equities give investors greater flexibility to progressively realise gains and manage CGT exposure over time,” he says.

“Super stands out increasingly as the more attractive concessionally taxed environment for long-term capital growth.”

Charts that expose benefits that flow to the wealthy

Budget document Statement 4: Tax reform for workers, businesses and future generations includes some fascinating data from the government, which it used to frame the changes.

#1 - CGT discount pushed investors towards property

#2 - A fixed CGT discount isn't effective for some property investors

#3 - Negative gearing is too distortive

The government also argued the combination of negative gearing and the 50% CGT discount created unusually strong incentives for investors to take on highly leveraged property bets.

“This leads to higher house prices — as investors bid up the price on a scarce resource to receive the concession,” the document states.

Treasury also argued the system distorted capital away from shares and higher-density housing toward leveraged property speculation. Around 40% of new investor lending is interest-only, compared to less than 10% for owner-occupiers.

“Investors have loans that exceed six times their income at more than double the proportion of owner-occupiers,” the Budget paper said, warning the system may have encouraged riskier and less diversified household balance sheets.

#4 - Trusts hoard too much wealth

The Government also made clear it believes discretionary trusts increasingly became a tool for tax minimisation among wealthier Australians.

Treasury analysis showed the number of trust structures has more than doubled over the past 20 years, with Australia now home to more than one million trusts - most of them discretionary trusts.

“These are largely used by high-income and high-wealth Australians; the wealthiest 10% of Australian households hold over 90% of the value of private trusts,” the Budget paper states.

"The minimum [30%] tax will mean a fairer rate of tax is paid on income from discretionary trusts, more closely aligning the tax rates for trusts with the rates paid by workers and families who earn a living from wages. This reform supports a fairer and more sustainable tax system."

#5 – The wealthy benefit far too much from the three tax pillars

The Government ultimately framed the reforms around one central argument: the existing system disproportionately benefited the wealthiest Australians. Presenting the below chart as its smoking gun, the government stated:

“Since 2000, the top 1% by lifetime income - with average real incomes of about $800,000 per year during their peak earning years - benefited from tax concessions worth more than $700,000 over their working life from a combination of the CGT discount, negative gearing and discretionary trusts.”

Important: these changes are not law yet

It’s important to remember the measures discussed in this article are currently proposals only.

The changes must still pass both the House of Representatives and the Senate before becoming law, likely through specific tax legislation and related Budget bills.

The final form of the reforms may ultimately differ from what was announced in the Budget papers.