Data centres need gas, whether investors like it or not

The AI boom needs more than chips and software, it needs power. APA Group could be a surprising winner as data centres consume more energy and investors seek reliable income.

For investors seeking equity market returns, the Federal Government's changes to capital gains tax could materially affect how after-tax returns are generated.

While the reforms increase the effective tax paid on real capital growth, it may not affect the tax treatment of income in the same way.

With no minimum tax rate proposed for income, but a 30% minimum tax rate on real capital gains, active dividend income strategies may become increasingly attractive, especially for investors seeking a greater proportion of their total return from income over capital appreciation.

So why is this the case?

The active harvesting of dividends and franking credits shifts a significant proportion of returns towards income.

What this means is that while fund managers continue to target outperformance relative to the benchmark's total return, a larger share of that return may be generated through income rather than capital gains.

Therefore, as this income is not subject to the proposed 30% minimum tax rate on real capital gains, investors may be less impacted by the effective increases in taxation on investment returns.

Companies capable of delivering a meaningful proportion of total returns through sustainable income may be particularly valuable in this environment.

One example that's piqued our interest at Ausbil is APA Group.

APA Group (ASX: APA) owns and operates gas transmission and distribution assets across all states and territories in mainland Australia.

Over the next three years, APA is expected to invest $3.5 billion in organic growth capex for gas transmission and storage assets and renewable projects. This is supported by existing balance sheet funding capacity.

Data centres are also a central earnings generator for APA as users of gas-powered generation, with the Australian electricity market transitioning away from fossil fuels. APA is seen as a key provider of reliable power, along with Origin and AGL.

APA's total return currently includes a distribution yield of more than 5% p.a. (based on the year to August 2026), and APA has been able to grow this distribution over time. This is partly because of the nature of its long infrastructure cash flows.

APA Group has been able to capture and slightly exceed CPI on its growth over the past year, with most of its return being income with inflation protection, which benefits our active dividend strategy.

As a smaller proportion of total return is derived from capital gains, the impact of the new CGT measures may be lower than for investments that rely more heavily on capital appreciation.

For many investors, this tax position also improves after the application of franking credits.

Investors may seek capital growth that shifts up by inflation to retain capital value. Under the CGT changes, the tax treatment of nominal and real capital gains may differ.

In theory, if capital growth broadly matches inflation, the impact of proposed taxation of real capital gains may be reduced, leaving a larger proportion of returns generated through income.

With its attractive yield, inflation protection and lower reliance on capital appreciation, APA is well positioned to deliver resilient after-tax returns under the CGT regime.

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