How Labor could sting you with 70% CGT for buying and selling shares

Under the current 50% discount system, those outcomes broadly offset each other over time. Under the proposed indexing model, they no longer do.

Ironically, the more diversified your direct share portfolio is, the more likely you may be to encounter this problem. However, that could unintentionally become a tailwind for broad-market ETFs, LICs and managed funds, which behave more like a single compounding investment over time and are less likely to experience the extreme dispersion between winners and losers that creates this scenario.

An unlucky confluence of events?

Now when we look at the modelling, naturally readers will have questions - one of the biggest being whether this scenario relies on an unusually unlucky alignment of events to culminate in a tax bomb.

But Brycki stands by the modelling.

“I don’t think the example relies on unrealistic assumptions at all. In fact it was deliberately designed to reflect how long term share investing often works in the real world,” he argues.

The chart above, which shows markets are often driven by a surprisingly small number of extreme winners, has been consistently observed across academic research such as the Bessembinder study and throughout market history. 

Brycki says it is also one of the major reasons many investors have gravitated toward indexed ETFs, because diversified ownership increases the probability of capturing those rare long-term outperformers.

“The issue becomes most pronounced in portfolios with a high dispersion between winners and losers. That includes direct share portfolios, venture investing, small caps, emerging sectors and concentrated growth investing,” he says.

“Importantly, I’m not arguing every investor will suddenly face a 70% effective tax rate. The exact outcome depends on inflation, holding periods and the distribution of returns within a portfolio. It could actually be much worse for some people.”

Why broad market ETFs may have an advantage

Brycki also rejects the idea that ETFs are completely immune from the same issue.

“If someone bought one thematic ETF that increased 10x, another that delivered mediocre returns below inflation and another that collapsed, you could absolutely see similar tax asymmetries emerge,” he says.

However, he argues broad market ETFs behave fundamentally differently from portfolios of individual shares because winners and losers are continuously pooled internally over time.

“Underperforming companies gradually leave the index, successful companies become larger weights over time and the investor is taxed on the ETF as a single compounding asset rather than dozens of individual positions,” he says.

“That smoothing effect makes Treasury’s modelling much more representative for broad market ETFs.”

By contrast, direct share portfolios remain exposed because the tax system effectively assesses every holding separately. That means the big winners remain taxable while many weaker investments stop generating useful offsets if they still rose slightly in nominal terms despite losing purchasing power after inflation.

"The proposed framework structurally favours smoother pooled compounding vehicles over dispersed direct equity portfolios.”

The potential behavioural shift for investors

Brycki believes the reforms could materially alter investor behaviour over time by encouraging investors to prioritise smoother return profiles and lower tax asymmetry.

“The biggest shift is that tax efficiency would increasingly favour lower-volatility, smoother compounding return profiles, passive pooled structures and broad index investing,” he says.

At the same time, he believes the reforms may penalise exactly the kinds of investing styles historically associated with innovation and entrepreneurial risk-taking.

“That’s a major change in incentives because under the new system you are punished if you have any holdings that have positive returns in nominal terms but not real terms.

Brycki also expects investors to become far more conscious of tax asymmetry when constructing portfolios.

“Under the proposed framework, investors may increasingly avoid strategies where many inflation adjusted underperformers sit alongside a few big winners,” he says.

Ironically, he warns that could discourage exactly the kind of higher-risk investing that historically generated many of the market’s biggest success stories.

Final note

It is worth being clear that these are proposals, not yet law. The legislation still needs to pass Parliament, and several measures remain subject to consultation and refinement.