The budget and its impact on your retirement

The tax implications for investing in different types of assets like property or shares, and the impact on investment structures like trusts or direct investments, has been under the most scrutiny.

At this stage, the budget still needs to be passed into legislation, and questions remain on certain policy details, for example:

Would capital gains tax be payable by an investor that generates a flat nominal gain during a period where inflation was negative over the holding period?

As a result, plenty more ink (and AI tokens) will be consumed in coming months critiquing the implications of this budget for investors.

Implications for retiree investment strategy

One of the risks during this period is that investors start to over-emphasize the focus on tax outcomes and lose sight of the bigger picture around investment strategy design - an example of the ‘tail wagging the dog’.

Financial Advisers will play a crucial role in supporting their clients to maintain investment discipline and navigate this uncertainty.

The silver lining for retirees is that the changes should have a limited impact on the investment strategy for pre-retirees and retirees (we do note there are other changes that will impact retirees, like the phasing out of the aged-based private health insurance rebates for over 65’s).

Given the recent Government focus on Superannuation, it was not implausible that Superannuation may have fallen captive to the Budget’s tax reform net.

Recall that only last year Treasury introduced a new Division 296 tax that reduced tax concessions for individuals with total super balances above $3 million from 1 July 2026. This year’s Budget turned its focus in the direction of Family Trusts, the other previously tax-advantaged investment vehicle. This leaves qualifying Superannuation contributions the most tax-effective allocation of incremental savings for balances below the $3 million threshold.

We view the lack of material changes to superannuation in the budget as positive.

Superannuation is a long-term savings commitment, and constant changes and uncertainty would likely adversely impact how individuals are able to plan effectively for retirement. We have always argued that greater certainty and clarity over the Superannuation System will help alleviate future dependency on the Aged Pension. Rather than be distracted by the noise around the Budget changes, the focus for retirees, and their advisers, should arguably remain on:

1. How to generate sufficient returns to meet future spending requirements, and manage future inflation and longevity uncertainty?
2. How to appropriately manage risks such as sequencing risks, and capital preservation once in retirement?
3. How to construct a robust and resilient income stream, which also provides flexible access to funds when needed?

The nuanced implication of the budget is that for financial advisers the focus on superannuation is now even more important for retirement planning and puts a premium on the ability to tailor appropriate retirement solutions for retirees.

Think deeper about your equity income strategy

Equity incomes strategies can play an important role in achieving the multiple objectives required by pre-retirees and retirees.

Perhaps the more significant aspect of the tax reforms was the fact that the treatment of franking credits was preserved, a clear benefit for investors in equity income funds such as retirees.

We believe this reflects the fact that the government has learnt lessons from the 2019 election where the Labor Party (at the time in Opposition) proposed removing the refundability of franking credits, an issue that contributed to their poor election result.

It was clearly established then that the Australian electorate were opposed to any changes with regards to the franking system.

This is attractive to income investors on zero or low marginal tax rates as franking poses an additional source of income, adding an additional component of after-tax total returns.

Franking credits are incredibly valuable and important for equity income investors, but I believe that there is an important aspect that is very often not sufficiently considered.

We reiterate caution regarding franking credits that the objective of any investment approach is to maximize ‘after-tax total returns’, of which franking credits is simply one component, as opposed to simply maximizing the total amount of franking credits.

It has been demonstrated that focusing simply on the highest franking stocks can lead to investors missing out on opportunities with lower total franking but offering significantly better total after-tax returns.

Franking credits are attached to dividends paid by companies paying Australian corporate tax. Companies that have significant investment opportunities may instead be focused on reinvesting their profits towards those investment opportunities rather than immediately returning profits in the form of dividends (and by association, franking credits).

However, it is this reinvestment in high-returning projects that can lead to higher dividend (and franking credits) in the future.

These investments are crucial for income investors focused on maximizing their long-term grossed up income.

We fundamentally believe that maintaining exposure to quality companies capable of compounding earnings and dividends over time, remains more important than maximising any single tax component in isolation.

Or in other words, invest in good and great companies to build long-term income stream.

Co-authored by Marlon Chan, Portfolio Manager and Partner, Blackwattle Equity Income Fund