Labor's tax overhaul could rewrite investing economics - this calculator shows how

UPDATE (11 MAY): Labor will propose winding back the 50% CGT discount and revert to the pre-1999 indexation system from July 2027 on Budget night. The change is reported to apply to all asset classes and will tax real gains adjusted for inflation over an investment's holding period. Please note before becoming law, it would need to pass Senate and receive Royal Assent.

Earlier this week, Wilson Asset Management's Geoff Wilson AO sparked debate among Livewire readers over the potential replacement of the 50% CGT discount with an indexation system - a move he warned would “slaughter” young investors by exposing more of their long-term compounded wealth to tax.

Under an indexation regime, however, that tax bill could soar to $5.07 million - equivalent to the full 47% marginal tax rate.

While some readers questioned the assumptions behind the example, Wilson later clarified his goal was to demonstrate “the impact of compounding in large and small numbers.”

The debate has since sparked widespread curiosity and concern among investors, prompting Stockspot’s Chris Brycki to build a calculator exploring the potential after-tax impact across investments including property, ETFs and businesses.

Below, I walk through the potential impact across key asset classes for Livewire readers using this tool.

The assumptions

First and foremost, we don’t know exactly what the government will announce, so please keep that in mind. For the purposes of this analysis, I assumed the new indexation system begins on 1 July 2026, investments are held for 20 years, inflation averages 3% annually, and the investor is taxed at the top marginal rate of 47%.

To create a starting point for comparison, I used long-term return data from sources including Vanguard, GoldPrice.org and the Livewire Long-Term Investing Report, then stripped out historical income returns to isolate capital growth assumptions:

• U.S. shares: 9.8%
• Gold: 8.95%
• Australian shares: 5.3%
• Investment property: 5%
• A-REITs: 2%

Please remember these are purely hypothetical assumptions for modelling purposes and past performance is not indicative of future returns.

The after-tax returns

I inputted these assumptions into Brycki’s calculator, which produced the following projections comparing the current 50% CGT discount regime against a hypothetical inflation-indexed system. Click the image to zoom in.

Observations

In fact, if you consider that Australian shares potentially have another 4% coming from dividends and franking credits, the after-tax returns become very competitive relative to U.S. shares and gold for some investors!

Education

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But here's the part that completely perplexes me: the after-tax returns on investment property barely changed. I had to rerun the numbers several times.

If property price growth falls to 4% annually - which is hardly unrealistic - given the weaker long-term returns of apartments, affordability constraints and underperforming pockets that naturally exist across cities - the after-tax return actually improves under indexation!

Certainly, a change to the regime could create some unusual incentives. Franked Australian dividend stocks, for example, may become almost as attractive as traditional growth assets once after-tax returns are considered.

The asset class under the greatest pressure

However, there is one category not listed above that could come under the greatest pressure: entrepreneurship.

Brycki argues that a move to an indexation regime could disproportionately hurt founders, many of whom sacrifice years of income and accept overwhelming odds of failure in the hope of eventually creating a valuable business.

His modelling showed that if a founder invested $25,000 into a business and eventually sold it for $1 million after years of retaining earnings and paying themselves little or no salary, they could face roughly $225,000 more in tax compared to the current 50% CGT discount regime.