Could new CGT rules make shares more attractive than property?

The way Australians invest in property, shares and other assets could change dramatically under proposed capital gains tax reforms.

When Australians think about investing, they usually focus on one question: "What will give me the best return?"

Soon, they may need to ask another one. "How will it be taxed?"

The Federal Government's proposed capital gains tax (CGT) reforms represent one of the biggest changes to Australia's investment landscape in decades.

From July 1, 2027, the long-standing 50% CGT discount is set to be replaced with an inflation-based system, alongside a minimum 30% tax rate on capital gains.

Existing gains accrued before that date will generally remain subject to the current rules, while gains accruing afterwards will fall under the new regime.

While much of the public debate has focused on whether investors will pay more tax, I think the more interesting question is this:

How will these changes influence the way Australians invest?

Because tax policy doesn't just change tax bills. It changes behaviour.

Over the years, we've seen firsthand how Australians adapt whenever tax rules change.

While every investor's circumstances are different, one thing remains consistent: once the tax implications become clearer, people naturally reassess how and where they invest.

Investors have always adapted

One thing I've learned after advising investors for many years is that they rarely stand still when tax rules change.

When superannuation rules are tightened, people contribute differently.

When stamp duty changes, buyers adjust their timing.

When depreciation rules change, investors rethink renovations.

Capital gains tax will be no different.

I don't expect Australians to stop investing. I expect them to invest differently.

How the proposed CGT changes could affect property investors

Property has long been Australia's favourite investment.

Part of that is cultural. Australians like owning bricks and mortar.

Part of it is financial. Property offers leverage, rental income and historically strong long-term capital growth. And part of it has been tax.

The combination of negative gearing and the 50% CGT discount created a powerful incentive to accept lower rental returns today in exchange for larger after-tax capital gains tomorrow.

As those tax settings change, that equation changes too.

Does that suddenly make residential property a bad investment? Absolutely not.

Good property in desirable locations will still have the same fundamentals it had yesterday.

Population growth, housing shortages, infrastructure spending and local demand don't disappear because tax legislation changes.

But I do think future investors will become much more selective.

Why rental income could become more important

For years I've met investors who were happy to buy a property producing very little rental income because they believed future capital growth would outweigh the ongoing losses.

Some of those investments worked brilliantly. Others relied almost entirely on favourable tax treatment.

Under the proposed rules, I think investors will place much greater emphasis on cash flow, higher rental yields, lower holding costs and stronger income generation.

Rather than simply asking, "How much will this property be worth in twenty years?", investors may increasingly ask, "Can this investment pay for itself along the way?"

That's not necessarily a bad outcome. It encourages more disciplined investing.

Could dividend shares become more attractive under the new CGT rules?

One trend I wouldn't be surprised to see is greater interest in listed investments.

Shares have always offered several advantages over property. They're easier to diversify, they're easier to buy and sell, and transaction costs are lower.

Investors can build portfolios gradually rather than borrowing hundreds of thousands of dollars from day one.

Australia's dividend imputation system also remains one of the most generous in the world.

If investors become less focused on chasing capital gains and more interested in generating reliable after-tax income, dividend-paying Australian shares could become even more attractive. Recent commentary already suggests many investors are reassessing the balance between growth assets and income-producing investments in response to the proposed reforms.

Why diversified investors could benefit

One behavioural change I hope these reforms encourage is diversification.

Australia has long had an unusually high concentration of household wealth tied up in residential property.

That's understandable.

Property has served many Australians well.

But concentrating too much wealth in a single asset class also creates risk.

A more balanced portfolio might include:

• Australian shares
• International shares
• Listed property trusts
• Fixed interest
• Cash
• Direct property

I've always encouraged clients to think about building wealth across multiple asset classes rather than relying on one investment to do all the heavy lifting.

Tax changes may simply reinforce that message.

Don't let tax become your investment strategy

One mistake I've seen repeatedly over the years is investors allowing tax to drive every decision. They buy a negatively geared property because the tax deduction looks attractive, hold an investment they no longer want because they don't want to pay CGT, or sell purely because they fear future rule changes.

Rarely do those decisions produce the best financial outcome.

Good investing has always been about fundamentals, quality assets, reasonable prices, long-term thinking and strong cash flow.

Tax should support those decisions, not replace them.

There may be opportunities as well

Interestingly, major tax reforms often create opportunities.

When some investors hesitate, others step forward. If fewer buyers compete for certain assets, prices may become more attractive. If more investors chase income-producing assets, growth assets may become relatively cheaper.

Markets rarely stand still; they adjust.

That's why I always caution against making investment decisions based solely on headlines.

By the time most people react emotionally to tax announcements, the market has often moved on.

What investors should do before the CGT changes start

One practical consequence of the proposed reforms is that planning ahead becomes increasingly valuable.

Investors will need to think carefully about acquisition dates, record-keeping and, in some cases, obtaining market valuations around the commencement of the new rules to correctly distinguish gains that accrued under the existing regime from those subject to the new methodology.

These aren't particularly exciting topics but they could ultimately have a significant impact on after-tax returns.

It's another reminder that successful investing isn't simply about picking winning assets; it's also about managing them well.

We've found that the investors who tend to achieve the strongest long-term outcomes aren't necessarily those chasing the biggest tax advantage.

More often, they're the ones who plan ahead, keep good records and understand how tax fits into a broader investment strategy, rather than letting it drive every decision.

The bottom line

The proposed CGT reforms will undoubtedly change Australia's investment landscape, but I don't think they'll fundamentally change what makes a good investment.

Quality businesses will still create wealth.

Well-located property will still appreciate over the long term.

Diversified portfolios will still help manage risk.

The biggest change, in my view, won't be the amount of tax investors pay. It will be the questions they ask before investing.

Instead of chasing assets primarily because they deliver the biggest tax concession, I suspect more Australians will focus on investments that generate stronger cash flow, better diversification and sustainable long-term returns.

And that's probably not a bad shift.

Because the most successful investors I've worked with over the years never built their wealth around tax rules.

They built it around good investment decisions.

The tax outcome was simply the icing on the cake.

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