CGT Discount Scrapped. Yield Rotation Started 12 May

Dear Reader,

For 26 years, the 50% CGT discount has paid you to be a growth investor.

That just stopped.

On budget night, 12 May, Jim Chalmers wound back the 50% capital gains tax discount that Peter Costello introduced in September 1999. From 1 July 2027, gains get indexed for inflation and taxed at your marginal rate, with a minimum 30% floor.

Negative gearing on established homes is gone the same day. Discretionary trusts cop a 30% minimum tax from 1 July 2028.

A quarter-century of tax-driven growth investing, gone in a single Tuesday.

No one asked for it. Albanese promised 50 times he’d never do it. And, it may well cost Labor the next federal election.

The ASX Growth Stocks Budget Wobble

Look at what happened between the close on 11 May (budget eve) and the close on 22 May.

WiseTech (ASX:WTC), down 12.3%. REA Group (ASX:REA), down 14.4%. Xero (ASX:XRO), down 8.7%. The three growth darlings of the ASX, all giving up high single-digit-to-teen percentages while the broader market drifted down a soft 0.5%.

Now look at the other side.

GPT Group (ASX:GPT), up 2.8%. Stockland (ASX:SGP), up 2.1%. A handful of other defensive yield REITs green alongside them. Money rotating out of stocks bought for the exit and into stocks bought for the cheque in the mailbox.

The broader A-REIT index sat flat overall, with industrial heavyweight Goodman Group (ASX:GMG) sliding. But that fits the thesis as GMG is valued much more like a growth stock than a REIT.

The rotation is selective. Defensive yield is what’s getting bid.

This rotation has 13 months left to run before the new regime even starts. The market is already moving on what the print press is still debating.

Let me show you the maths that’s driving it.

The CGT Discount Maths

You buy $100,000 of a growth stock. You hold for 10 years. You sell for $250,000. A $150,000 gain.

Under the old rules, top bracket. Apply the 50% discount, then your marginal rate of 47% on the remaining $75,000. Tax bill of $35,250. Effective rate of 23.5%.

Under the new rules, you index your cost base for inflation. Assume 3% a year and the cost base climbs to roughly $134,000 after a decade. Taxable gain falls to $116,000.

Tax at 47% is $54,520. Effective rate of 36.3%.

The growth investor just lost 12.8% of their gain to tax.

Now run the same exercise on a fully franked dividend.

A 5% fully franked yield on the same $100,000 throws off $5,000 a year. Grossed up at the corporate rate, your franking credit is $2,143. Tax on the grossed-up amount at 47% is $3,357. Subtract the credit and your personal tax bill is $1,214 on that $5,000.

Effective rate of 24.3% on the cash.

Over 10 years, $50,000 of dividends, $12,140 of tax. Take-home $37,860, year after year, with no exit tax to worry about because you never sold.

Now, this isn’t the full picture. Growth stocks have historically delivered bigger absolute returns than a 5% yield, and the $150,000 gain in the example above dwarfs the $50,000 of dividends even after the new tax bite.

The yield side doesn’t win on absolute dollars. Growth still throws off bigger gains over a decade for the investors who pick right. What changed is that the tax code just strapped a 12.8% ball and chain to the growth side of this race.

This doesn’t mean growth is suddenly useless. It means the methodology for valuing growth shifts. Capital demands a higher hurdle or accepts a lower price. And income, considered the safer bet for good reason, gets a bump in relative attractiveness it hasn’t enjoyed since 1999.

So what does this do to money in motion.

The Three Behaviours The Budget Will Drive

The second-order effects are bigger than the maths.

Property investors pivot to cash-flowing assets. Negative gearing on established homes is dead from 1 July 2027. Losses on those properties no longer offset your salary.

The ‘paper loss against wages’ tax structure that built the Aussie property investor class for two decades, gone.

The same person who used to swallow $8,000 a year out of pocket on a Surry Hills apartment for the capital growth now runs the numbers on a positively-geared regional house, a yield ETF, or a fully franked bank stock instead.

Self-managed super dials up the dividend exposure. Super funds and widely held trusts are exempt from the new minimum tax. They keep the equivalent of a one-third CGT discount on assets held over twelve months.

That makes super the cheapest tax wrapper left for any long-hold strategy.

The $1.1 trillion sitting in SMSFs already tilts to franked yield. The new regime just made that tilt the structural default for the next decade.

Trust holders restructure from the ground up. A 30% minimum tax on discretionary trusts from 1 July 2028 hits hundreds of thousands of family structures.

Three-year rollover relief softens the blow. The flow lands in bucket companies, fixed trusts, and listed investment companies. LICs catch the rotation.

Three behaviours to watch out for over the coming years, as the market adjusts to the new reality.

What The Index Looks Like In 2030

Australian super sits at $4.5 trillion as at December 2025. SMSFs alone hold $1.1 trillion. That money has options. It goes wherever the after-tax maths is best.

The post-Tuesday maths says cash flow beats deferred gain. So capital reallocates. You can already see where.

The banks. Westpac (ASX:WBC), NAB (ASX:NAB), ANZ (ASX:ANZ). All three pay 4-5% fully franked. Gross them up and you’re looking at 6%+.

Commonwealth Bank’s (ASX:CBA) been stretched on absolute valuation for a long time now and it sold off 4.8% in the two weeks since budget. The other three barely moved.

Money’s not piling in indiscriminately. It’s being choosy about price.

The listed REITs. GPT Group (ASX:GPT), Dexus (ASX:DXS), Stockland Corporation (ASX:SGP). The sector trades on cash flow yield. Trust structures inside REITs are widely held, so they’re carved out of the new minimum tax.

We can expect boring old REITs to come back into vogue, although short-term interest rate rises will put pressure on their bottom line. Look out for REITs with locked-in, low-cost hedge books and structural rent rises. Names like HomeCo Daily Needs (ASX:HDN) and Charter Hall Long WALE REIT (ASX:CLW).

Both run CPI-linked leases on defensive tenants and have hedge books long enough to smooth the rate shock through the cycle.

The broader REIT setup we’ve been tracking sits squarely in this rotation.

The utilities and infrastructure plays. APA Group (ASX:APA), Origin Energy (ASX:ORG), Transurban (ASX:TCL). Cash flow with pricing power baked in via regulated tariffs or inflation-linked tolls. This is the part of yield we like best because it pairs the tax tailwind with the inflation hedge we’ve been pounding the table on since January.

On the other side of the ledger, growth names take the hit. WiseTech, REA Group, Xero. None pay meaningful dividends.

All are bought for the exit. All just lost 12.8% of their after-tax return for the long-term holder.

This could lead to further pummelling of oversold, high-quality growth names. Picking the bottom will be tricky. But many of these super-growth stocks will turn into dividend aristocrats over time.

The best of both worlds?

We all get to watch this play out in real time.

Yield trades up. Growth trades down. Slow at first, then faster as 1 July 2027 approaches.

The rotation we just watched happen in two weeks is the appetiser. The main course runs through 2027.

Which brings us to a historical refresher.

The Last Time Australia Inflation-Indexed CGT

We’ve been here before.

Between September 1985 and September 1999, Australia ran a CGT regime built on cost base indexation. No 50% discount. Inflation-indexed cost base only.

The All Ordinaries in that window was led by yield-heavy industrials, banks, miners with dividend programs, and listed property trusts. Growth investing in the modern sense was a side dish. The market culture was income, fully franked, with capital gain as a bonus.

Costello blew that culture up in 1999.

He wanted to encourage risk capital. He got a quarter-century of growth-skewed retail behaviour, a property investor class addicted to negative gearing, and a whole heap of ASX nano-cap speculation.

The 2026 budget is Costello’s reform, reversed.

Cost base indexation, back. The 50% discount, gone. Negative gearing’s wage-offset benefit, gone for established homes. Trust structures, taxed at a 30% floor.

The entire tax architecture flipped back to favour income over growth, almost exactly as it sat pre-1999.

The market culture follows the tax code. It always does.

The retail investor who anchors to yield, holds long, and reinvests franking credits is getting a boost this decade.

The retail investor still chasing the next ten-bagger does it with a 12.8% headwind they didn’t have last month.

Which leaves you with one question.

The Edge

You have 13 months.

Thirteen months before the new system kicks in. Thirteen months where the 50% CGT discount still applies to any gain you crystallise before 1 July 2027. Thirteen months where the market re-rates yield stocks ahead of the deadline.

The flow comes early. By the time the headline writers catch up, you’re a follower.

Three questions to sit with this weekend.

What does your portfolio look like net of the new CGT regime applied to your existing growth names. If you’d planned to hold and sell after 2027, you might want to do that maths today.

How much of your growth allocation should rotate to cash-flow stocks before 1 July 2027. Banks are stretched at the top end. REITs are cheaper. Pricing-power yield in utilities and infrastructure is the cleanest expression.

What structure are you holding all of this in. If you’ve got a discretionary trust, you have a different set of decisions to make in a different time window. Get on it now, not in 2028.

If you haven’t read it yet, we suggest checking out the mammoth implications this budget has for the LNG sector too. That piece reshapes the east coast gas market. This one reshapes everything else.