How CGT Changes Level The Playing Field For Income Investing

This article was originally written by Keith Ford and published on Livewire Markets

The easy answer for investors looking to avoid the capital gains tax changes announced in the budget would be to pivot their holdings towards income and away from growth.

It’s certainly an option that would make sense, with the overhaul of the capital gains tax rules changing the equation for the post-tax value of an investment.

Even before the official announcement of the changes, modelling was underway to understand how an inflation-adjusted treatment of capital gains would shape investment.

UBS, for example, explained in an equity strategy note that removing the 50% CGT discount would make growth investments “somewhat less attractive”.

“By contrast the relative attractiveness of stocks where returns are more driven by their steady income streams become more interesting under the scenario where the 50% CGT discount is replaced by indexation,” UBS said.

Vertium Asset Management founder Jason Teh agrees, saying that removing the CGT discount shifts the relative attractiveness of income over growth and “levels the playing field that previously heavily favoured growth-oriented investing”.

“For investors, capital gains from growth equities will now be taxed at their full marginal rate (subject to inflation indexation and a 30% floor), rather than at an effective rate of roughly 23.5% for a 47% taxpayer,” Teh explains.

“In contrast, franked dividend income was already taxed at marginal rates. The structural tax advantage of deferring gains inside a growth portfolio has been significantly reduced.

“The effect is most pronounced for investors outside the superannuation system. For individual investors the attractiveness of high-yield, fully franked equities rises on a relative after-tax basis, with the benefit scaling with the marginal tax rate.”

The impact can be seen in the chart below, which compares two strategies earning the same 10% pre-tax return – a dividend strategy as 5% franked yield plus 5% growth and a growth strategy as 10% pure capital growth.

Author’s analysis, modelled with AI assistance. Figures are illustrative and based on proposed 2026–27 Budget measures not yet legislated, assumes a flat marginal rate and a 10% return.

Under the current system, the tax deferral on the lump-sum gain outweighs the drag of yearly dividend tax.

However, with an inflation-adjusted CGT system, the growth strategy’s after-tax returns drop by more than $2,400. In contrast, the dividend strategy barely changes.

Australia is already dividend heavy

While Teh notes that the current system “heavily favoured” growth investing, the dividend imputation system that was introduced in 1987 had already created a more attractive environment for Australian income investors than in other markets.

“Domestic investors unsurprisingly embraced the dividend imputation scheme, with

companies responding by elevating their pay-out rates,” UBS explained.

“The net result has meant that Australian equities typically pay a dividend yield which is double that of global stocks.”

As things stand, Australia already has the highest pay-out ratio among major developed markets.

Source: Global X

Now that the latest proposed changes in many cases make a dividend strategy more attractive than a growth-focused strategy, how much more can yields grow?

“At the margin, the shift in tax incentives may tilt capital management decisions toward special dividends over share buybacks,” Teh explains.

“Buybacks deliver returns in the form of capital appreciation, which under the new regime faces a higher effective tax rate, whereas a special dividend with attached franking credits becomes comparatively more tax-efficient for eligible shareholders.

“So, while the overall quantum of dividends is unlikely to surge, the composition of how excess capital is returned could gradually shift in income’s favour.”

Despite the shifting landscape, the Vertium founder says he doesn’t expect the flow of funds to dramatically shift away from growth and into income equities.

“A few mitigating factors are worth noting. First, the changes are largely prospective. Gains accrued prior to 1 July 2027 retain the 50% discount, while post-2027 gains are indexed from the asset’s market value at that date rather than the original purchase price,” Teh says.

“Investors have limited incentive to crystallise positions ahead of the transition, which dampens the prospect of an abrupt fund flow rotation.”

Secondly, the CGT changes don’t affect super funds, so the budget changes won’t “materially alter the calculus for superannuation capital allocation” for either accumulation or pension phase members.

“The rotation will be more visible at the individual retail investor level. For those holding growth equities in their own name outside of super, the after-tax comparison between capital growth and franked income has materially shifted,” Teh adds.

“The CGT changes amount to a straightforward tax grab on capital growth. The logical response is to shelter more capital within superannuation. However, there is a limit to this shelter as those with balances above $3 million will find the new legislated Division 296 tax ensures the government captures a share of that, too.”

Disincentives to growth

Given the franking credit system already provides an incentive for companies to distribute earnings rather than reinvest them in the business, Teh says there is a chance that even more money flowing into income equities could negatively impact long-term returns.

“If the CGT changes accelerate investor demand for income, companies may face growing shareholder pressure to raise dividends or pay special dividends rather than invest in capex, R&D, or acquisitions to grow their business,” he explains.

“This matters because Australia already suffers from chronically weak business investment and productivity growth relative to global peers. A tax system that further rewards distribution over reinvestment risks entrenching that structural weakness.”

It’s no secret that the government is looking to turn around the country’s lagging productivity growth, which is sitting at its lowest level in 60 years.

Labour productivity calculated as GDP per hour worked. GDP data sourced from the ABS between 1964-65 and 2024-25. Hours worked data from Penn World Tables for between 1964-65 and 1973-74 and from the ABS between 1974-75 and 2024-25. 

Source: PC estimates based upon ABS (2026) and Feenstra et al. (2015).

In this context, Teh says it is “difficult to reconcile” the direction of the budget changes with the government’s “ambition to lift productivity and drive a new wave of business investment”.

What are the top yielding stocks?

According to UBS, these are the five S&P/ASX 100 stocks that have maintained the highest average annual dividend yields over the last 10 years:

• Bank of Queensland (BOQ): The bank has a market cap of $4.2 billion and delivered a 10-year average dividend yield of 6.2%.

• Stockland (SGP): The property group with a $9.7 billion market cap had an average dividend yield of 6.1%.

• Vicinity Centres (VCX): The REIT has a market cap of $11.3 billion and an average yield of 5.9%.

• ANZ Group (ANZ): The largest company on the list with a market cap of $111.3 billion, the Big Four bank had an average dividend yield of 5.8%.

• Aurizon (AZJ): The rail freight operator has a market cap of $6.8 billion and a dividend yield of 5.8%.