Proposed Budget changes: what young investors should consider

"I'll be fine, but you guys - less so." That's more or less what I told some of my younger colleagues in a recent team meeting as we discussed the proposed capital gains tax changes in the budget.

The people in that room ranged from their mid-20s to mid-40s. Some were already more financially established. Others are only just starting to build wealth.

As someone responsible for the livelihoods of more than 30 people, I am acutely aware that policy changes like this do not fall evenly. They land hardest on those who have the least accumulated capital and the longest road ahead. That is why these changes worry me.

The blanket application of a 30% minimum tax on gains, combined with indexation, across a wide range of assets risks distorting investor behaviour. It makes long-term growth assets less attractive at exactly the point when younger Australians have already been shut out of the old wealth-building playbook.

For older generations, we've been able to ride the capital growth wave on our properties and pay tax on favourable terms. Much of that wealth has already been made and is protected.

Younger Australians have been told to adapt. If housing is out of reach, invest in shares. Build wealth through exchange-traded funds. Start a business. Take some sensible risks early and let compounding do the work.

Now they are being told the tax settings on those risk-taking decisions are changing, too.

That is the part that should trouble us most. If you close off the old path to wealth, then make the alternative paths less attractive as well, you are not levelling the playing field. You are pulling up the ladder.

Plenty has already been said about why the proposed changes won't help the people they're supposedly intended to help. My greater concern is what they do to behaviour over time.

Fewer people backing themselves. Fewer people putting money into higher-growth assets and deciding it is safer to stay in cash, chase yield or - if they have the ambition and the option - build their future somewhere else.

So, what should investors do now?

1. Focus on after-tax outcomes

In a world where realised gains matter more, portfolio turnover matters more too. That does not mean never selling, it means avoiding unnecessary churn, being more selective about what you buy, and recognising that a lower-turnover portfolio can be more tax-efficient over time. Frequent switching feels active, but it can end up handing more of your return to the Tax Office.

2. Think harder about the role of each asset in your portfolio

Growth assets, income assets, defensive assets and cash all have a job to do. If the rules change, the answer is not to abandon growth altogether. A younger investor still needs exposure to assets capable of compounding over time. A more conservative investor still needs liquidity and stability. Tax should inform the structure, not dictate it.

3. Be tax-aware, not tax-obsessed

That means understanding when gains are being realised, considering how rebalancing is done, and thinking carefully before selling simply because a tax rule has changed.

But it also means not passing up good long-term investments purely because tax might be payable one day. Avoiding tax is not the same thing as building wealth.

4. Don't forget super

For younger Australians trying to build a first home deposit, the First Home Super Saver scheme may still be one of the few tax-effective tools left.

And for those already investing outside super, consider whether some of that money would be better directed into super instead.

For investors with a longer time horizon, super becomes even more important if capital gains outside the system are taxed more heavily.

5. Use your time advantage

Younger investors still have one enormous advantage: time. Governments can change tax settings. Markets can change direction. Opportunities can shift from property to shares to businesses and back again.

But time, diversification and disciplined investing still do the heavy lifting of long-term wealth creation for most Australians.

This article first appeared online in the Australian Financial Review. 

Upcoming webinar

For those who want to dig a little deeper, Alan Kohler and Intelligent Investor founder John Addis will be hosting a live webinar at 1pm AEST on Thursday 18 June.

They'll discuss the proposed changes and what they could mean for property, shares, ETFs and long-term wealth creation.

You can register here.