Local markets tend to not gyrate to domestic tax policy. As the market is traditionally forward-looking and with much of the Budget changes already "leaked", it's appropriate to believe that the stock market has already digested most of the mooted changes over the past few weeks and any changes are already "in the market".
Indeed, with the rise and rise of AI, worries about inflation, Iran and irregular US foreign policy, the market has had more pressing issues to digest over the last few months than some domestic personal tax tinkering.
A New Era for Portfolio Construction
That said, changes to tax policy have changed the rules of efficient investment portfolio construction. Arguably, Australia now maintains the most generous tax rate for investment income (as a result of franking credits), but one of the most punitive taxation rates for capital growth!
This change to personal tax policy comes at an interesting time. More traditional, high income paying industrial investments (the backbone of the Australian sharemarket) have recently underperformed foreign growth-focused AI and technology stocks which tend to have low or zero dividends, but have prospects of higher growth. Indeed, as foreign investments also have no franking credit attached to their dividends, this could now make foreign investment less attractive than domestic opportunities on an after-tax basis.
Who Will Benefit?
Companies with high, fully franked dividend policies could become more attractive and support their share price (think BOQ etc).
With negative gearing being limited to new-build housing stock, this certainly helps the listed constructors such as Stockland, Lend Lease and Mirvac, however with rising interest rates, increased cost of living and higher input costs, it's unlikely that this small tail-wind is enough to offset the strong headwinds these companies face.
Despite the increased energy and defence spends announced, energy and defence themes were already up strongly prior to the initiatives of the Federal Budget, stemming from the war in Iran and question marks over traditional defence alliances. These global themes are likely to be more of a driver of asset appreciation than policy announcements, but the increased domestic spend won't hinder those aligned to the defence sector. The announced energy and fuel security package could benefit domestic producers / refiners such as Ampol, Woodside etc.
Super Moves to Centre Stage
As a result of the taxation of trusts and the removal of negative gearing, one could argue that superannuation (and to a lesser extent insurance bonds) is now the pre-eminent investment vehicle for those seeking to mitigate tax on their investments. As a result, the likes of HUB24, Netwealth etc may see increased flows. That said, as these are relatively low-dividend assets, there is a countervailing argument for their shares to be less appealing to the investor!
What to Do Now
In the days and weeks following this budget announcement, it is imperative that clients review their portfolios and adjust accordingly. The interplay between trusts, personal assets and superannuation has never been more important and "getting the right assets in the right buckets" should be front of mind for those seeking to lessen the impact of tax change on your post-tax profit.
The rules of the investment game have changed. Your strategy should too.
Whether you hold assets in super, a trust, or directly, the tax changes in this Budget have real implications for how your portfolio should be structured going forward. The right assets in the right vehicles could make a significant difference to your after-tax returns. But getting that right takes more than a quick portfolio review. It takes a financial planner and tax advisor working together.
BlueRock's Private Wealth team brings together financial planners, tax advisors and investment specialists under one roof. If you want to understand what this Budget means for your wealth strategy, get in touch today via the form below and we'll connect you with the right expert.
