Can Jim Chalmers Make Us Better Investors?

Could it be that Treasurer Jim Chalmers has done us all a favour and made us really think long and hard about how we invest for the long term?

Well, I’m certainly no fan of his new capital gains tax framework from a personal level or at a policy level, given the apparent lack of thought that has gone into the consequences of some of the proposals.

Just one small example—two retirees with exactly the same level of assets being subject to two very different rates of CGT, depending simply on whether one of them receives a part pension.

However, like a family with one remaining tip voucher, the changes may have prompted the mother of all investment cleanouts, with every square centimetre of the investment cupboards and wardrobes being scoured for long forgotten capital gains or losses and any dusty old investment being examined to see if it still brings us joy.

Start Planning Now

Rather than shouting at clouds and getting angry at changes that have now been legislated by Parliament, it is much more constructive to start doing your homework and working out the best way to position yourself to cope with the changes.

Leaving aside for a moment the many shortcomings and downright unfairness of some of the tax modifications, could many of us benefit from a kick in the pants and having a really close look at our investments and how they can best finance our future?

I know I have been forced to do a lot of thinking – some of it long overdue – now that we are all faced with a 30% minimum capital gains tax on asset disposals, even if we earn no other assessable income that financial year.

Old Assumptions Have Changed

I had assumed – unwisely, as it turned out – that I had the luxury of time on my side when thinking about selling down shares that I have held for decades which show some really impressive capital gains.

Now there is less than a year to decide whether to crystallise those gains under the old CGT discount rules or embrace the complication of two different CGT calculations and a punishing minimum CGT of 30% under the new inflation indexed system.

I know too well about Warren Buffett’s warning to only hold assets you will be happy with over the very long term but now that I pass my eyes over the portfolio, some new considerations come into very sharp focus.

One is concentration risk—just because I might be sitting on a stock that has produced a hefty gain of five times its original purchase price, is it really worth hanging on to for another 20 years or leaving it as such a dominant feature among the portfolio?

Particularly when it has an attached hand grenade of capital gains that threatens to blow a limb off anyone selling it.

Or am I better to take a hit this financial year from the last of the CGT discount calculations and rebalance to an exchange-traded fund (ETF) or listed investment company (LIC) that offers much greater diversification, less risk and a more durable and reliable dividend yield?

It’s a no brainer really to remove that single stock risk and is something that I should have actually pulled the trigger on already but it took Jim Chalmers and his big new CGT stick to whip me into action and do some really long-term thinking and act on it.

Direct Share Portfolio Risks

Another risk is continuing on with a diversified share portfolio outside of super when the CGT changes effectively favour more passive approaches that internally net out capital gains and losses such as ETFs and LICs.

A third risk might be to continue striving for maximum capital growth when a more even-handed approach of seeking out fully franked yields which are concessionally taxed might be preferable.

It will be no surprise if the 2025-26 and 2026-27 financial years are bumper ones for capital gains tax collections as many people restructure their finances and finally knock them into shape.

Are Trusts Worth Persisting with?

It is a similar story for those who use family trusts.

There may still be some really good asset protection and estate planning reasons for having a family trust but I suspect there are also plenty of discretionary trusts sitting around chewing up annual accounting and auditing fees and doing precious little to improve household finances.

That is particularly the case now that some of the tax saving income redistribution facilities have now effectively been taxed out of existence, along with the bucket companies used to store distributions.

A Jim Chalmers shove might be just the thing to finally ditch the old trust and consider a better method of holding assets without triggering a hefty 30% tax on all distributions.

Even if the trust is retained, focussing on the real purpose and making sure it is producing good results is probably an overdue revamp.

Focus on maximising super

It is a similar picture for superannuation, which the Budget changes ensured will now remain the absolute pinnacle for tax effective retirement savings.

I have never seen so much concentration of how to maximise concessional and non-concessional contributions than the weeks following on from the Budget.

There has also been a greater concentration on the importance of the principal place of residence as a lightly taxed store of wealth.

The Perils of the Active Investor

A final reminder among all of this reshuffling of assets and restructuring of portfolios is to remember the power of passive investing amid the temptation to roll your sleeves up and pick some winners yourself.

The numbers don’t lie and the latest SPIVA report by S&P shows the apparent futility of trying to pick well resourced and professional active fund managers to get performance above that provided by indices such as the ASX 200 and the S&P 500.

Once again, the passive investor who just buys the index with a simple ETF dominates proceedings.

Over the past 25 years, the ASX 200 – a collection of Australia’s 200 biggest companies – has returned an average of 8.5 per cent per year with dividends reinvested.

Only one-in-four Australian active managers picking Australian stocks beat the market—the remaining three-quarters couldn’t beat the ASX 200 index after accounting for their fees.

For Australian active managers picking global stocks, only 30% beat their benchmark, the S&P World Index.

While the numbers were a bit better for active managers in the small and mid-cap space with 36% beating their benchmark, that still leaves almost two-thirds charging higher fees for worse performance.

10-Year Picture Even Worse

Using the same comparisons over the past ten years only 12% of active managers have outperformed the ASX 200.

For global stocks, just 5% have outperformed while for smaller stocks, 20% have outperformed.

If it is any consolation, the ten-year picture is even worse overseas with only 14% of US active managers outperforming the index, just 3% of active managers in Europe and Canada just 1% of active managers managed to come out on top.

Increased Index Exposure

If you are looking to revamp your finances in the wake of the Budget tax changes, it might also be worth getting with the strength and increasing your core passive ETF exposure, even if you still want to have a walk on the wild side and pick your own shares or alternative assets like crypto around the edges as satellite investments.

These SPIVA numbers don’t lie and choosing to take the plunge and become a passive investor is effectively the best thing you can do to improve your chances of a better investment result.

So, we might all agree that some or even all of the Budget tax changes are bad reforms but using the new CGT deadline as a means of reviewing and fine tuning our own positions, it is possible that even negative tax changes can provide an opportunity to become a better investor.

After all, investment is an ongoing process that requires reacting to changing circumstances and taking a totally hands off, set and forget approach can be very dangerous.