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This communication is intended only for wholesale clients
within the meaning of sections 761G and 761GA of the Corporations Act 2001 (Cth).

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Dear Investors, Prospective Investors and Advisers,​

 

Tuesday night's Federal Budget included the most significant changes to Australia's capital gains tax (CGT) system in 25 years, as well as important changes to the taxation of discretionary trusts. We wanted to write to you promptly with our assessment of what these changes mean, and why we believe they reinforce the investment case for income-focused, highly franked Australian equity strategies.

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What changed​

• CGT discount replaced by indexation​

From 1 July 2027, the 50% CGT discount for individuals and trusts will be replaced by two mechanisms working together: cost-base indexation (where only gains above inflation are taxed) and a 30% minimum tax rate on net capital gains. Superannuation funds are explicitly exempt and retain their existing 33.3% CGT discount. The small business CGT concessions are also unchanged.​ For investors holding assets before 1 July 2027, gains accrued to that date retain the benefit of the existing 50% discount. Only gains accruing after that date are subject to the new rules. This grandfathering provides meaningful transition protection for existing portfolios.

 

• Discretionary trust minimum tax

From 1 July 2028, a separate minimum tax of 30% will apply to the taxable income of discretionary trusts. For investors who hold assets through a discretionary trust, the imputation system continues to play an important role. Franking credits received by the trust can be used to meet the trust-level minimum tax, meaning a trust holding highly franked Australian equities can satisfy its minimum tax obligation without a cash outflow, preserving more income for distribution to beneficiaries. A trust holding unfranked income does not have this offset and must fund the minimum tax in cash. Franking therefore remains a material structural advantage for discretionary trusts under the new rules, not just for individual investors. Investors distributing trust income to a corporate beneficiary should seek specialist tax advice, as those structures are subject to additional complexity under the new rules.

 

Importantly, all of the measures described above are announced proposals only. They must still pass through both houses of Parliament and receive Royal Assent before becoming law. Draft legislation has not yet been released, and the Government has indicated it will consult on key design details before doing so. While we expect the broad framework to proceed given the Government's strong parliamentary position, the final design may differ from what was announced on Tuesday night.

 

What it means for investors

We have analysed the after-tax return implications of the new rules across a range of investor types, holding pre-tax returns constant to isolate the tax effect. These are modelled, indicative outcomes only and should not be relied upon as a guarantee of future returns.

 

Our modelling indicates that, across every investor type examined, a high-yield, highly franked portfolio produces meaningfully better real after-tax returns than a portfolio of equivalent pre-tax return but with lower yield and higher capital growth. This advantage holds whether the investor is an individual on the top marginal rate, a superannuation fund or a tax-exempt entity.

 

The reason comes down to how the new rules interact with the Australian dividend imputation system. Franking credits, which represent corporate tax already paid on your behalf at the 30% company tax rate, remain fully intact under the Budget. There are no changes to the imputation system. A portfolio generating highly franked dividend income therefore continues to deliver income that has been substantially pre-taxed at source, reducing the additional personal tax liability meaningfully compared to what the headline marginal rate would suggest.

 

Capital gains, by contrast, are now subject to indexation and the 30% minimum tax floor from 1 July 2027. For portfolios where a significant proportion of total return is derived from capital appreciation rather than income, the after-tax cost of realising gains increases materially under the new regime, particularly in lower-inflation environments.

 

The practical implication is that the Budget has shifted the after-tax return equation in favour of income-oriented, highly franked Australian equity strategies, and done so across all investor types.

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The modelled outcomes are based on stated assumptions and may not reflect individual circumstances. Tax treatment will vary depending on an investor's tax position, holding period and portfolio composition, and the announced measures remain proposals subject to legislation. As with all equity investments, the value of your investment and income derived from it can fall as well as rise, and a focus on income and franking does not eliminate investment risk.

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For investors, prospective investors, or advisers who would like to review the underlying analysis supporting the observations in this communication, we are pleased to make this available on request.

 

Our approach

Our investment strategy has always prioritised sustainable, high-franked income from high-quality Australian companies. The Budget changes do not require us to alter our approach. If anything, they confirm that the structural characteristics of our portfolio, high yield, high franking and a disciplined focus on quality income, are increasingly aligned with the after-tax interests of Australian resident investors.

 

We will continue to monitor the legislative process closely as draft legislation is released for consultation, and will update you on any material developments. If you would like to discuss the implications of these changes for your specific circumstances, please contact us or speak with your financial adviser.

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Kind regards,​

Hamilton12 Pty Ltd

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This communication is intended only for wholesale clients within the meaning of sections 761G and 761GA of the Corporations Act 2001 (Cth) and must not be distributed to, or relied upon by, retail clients. It has been prepared by Hamilton12 Pty Ltd (ABN 72 626 045 412, CAR 001298730) as investment manager of the Hamilton12 Australian Shares Income Fund and is issued subject to review and approval by K2 Asset Management Ltd (ABN 95 085 445 094, AFSL 244393) as trustee of the Fund. The information is general information only and does not constitute personal financial advice, tax advice, legal advice, or an offer or recommendation to acquire units in the Fund. It has been prepared without taking into account any person’s objectives, financial situation or needs. Prospective investors should read the Fund’s Information Memorandum, available at www.hamilton12.com, and seek professional advice before making any investment decision. Past performance is not a reliable indicator of future performance. Investment returns are not guaranteed.

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