Are Australian equities appealing amidst the CGT changes?

Are Australian equities appealing anymore in the brave new CGT world we live in? For more than twenty years, the rule was simple: hold an asset for more than twelve months and you receive a flat 50% discount on the gain. It was elegant, predictable, and indifferent to inflation.

The proposed shift back toward indexation forces investors to think not just about the nominal return on an asset, but the real return after inflation and tax. It also forces a deeper question: does the new regime make ASX equities more attractive relative to other asset classes, or less? The question is not: is investing in any asset class less attractive? The answer is: yes, in all likelihood. But the question is: How ASX equities stack up?

The answer is: it depends. In some respects, ASX equities promise higher returns, but in others there are. But in the current environment where inflation is high, and investors hold for the long-term, they may find returns to be higher.

The most useful way to think about this is to isolate the five forces that tilt returns in favour of the ASX, then the five forces that tilt them away. Only then can we understand how indexation interacts with inflation and how that shapes the after‑tax return profile of domestic equities.

5 reasons why Australian equities are appealing under the new regime

1. Franking credits

Franking credits have not been touched (at least not yet). And so franked dividends become a more powerful offset. The ASX is uniquely positioned here because banks, insurers, telcos, and mature industrials distribute a large share of earnings as franked dividends. International shares cannot offer this. Historically, the ASX’s dividend yield has averaged 4–5%, and when franking is included, the grossed‑up yield often sits closer to 5.5–6%. Over the past twenty years, dividends have accounted for roughly half of the ASX’s total return, and franking has amplified that contribution. Under indexation, that relative advantage grows because the tax burden shifts away from income and toward capital gains.

2. Many Australian equities (at least large caps) can pass through inflation costs (without customers cutting back)

The ASX is dominated by sectors that can pass through inflation, including banks that adjust margins, miners that sell commodities priced globally, energy producers that benefit from higher input prices, and supermarkets and infrastructure operators that have pricing power. By contrast, global indices, particularly the S&P 500, are heavily weighted toward long‑duration technology stocks whose valuations compress when inflation rises. If inflation remains sticky, the ASX’s earnings base may prove more durable, supporting higher real returns relative to global equities.

3. No currency drag

International equities introduce a second layer of return variability through foreign exchange. Over the past decade, the Australian dollar has swung between US$0.55 and US$0.80. These swings can amplify or erode offshore returns in ways that have nothing to do with the underlying asset. Under a new CGT regime, where real returns matter more, the volatility introduced by currency movements becomes a larger consideration. ASX equities deliver returns in the investor’s home currency, removing that drag. If the Australian dollar strengthens, a plausible outcome if commodity prices remain firm, international returns fall in AUD terms while domestic returns remain untouched.

4. A potential redirection of domestic capital flows

If the new regime increases the tax burden on capital gains on most growth assets, investors may prefer assets that deliver returns through income rather than appreciation. Super funds, insurers, and retail investors may tilt toward domestic equities with high, franked yields. That structural bid supports valuations and compresses risk premia. International equities, which rely more heavily on capital appreciation than income, do not benefit from this shift.

5. The relative weakness of property and bonds in a high‑inflation environment

Indexation affects all capital assets, but property and bonds face their own headwinds. If the new regime tightens negative gearing or reduces depreciation benefits, residential property becomes less compelling. Property, especially commercial property, faces refinancing risk as interest rates normalise. Bonds may continue to deliver negative real yields if inflation remains above the cash rate. In that environment, ASX equities, particularly high‑cash‑flow, high‑dividend names, become the superior income‑plus‑growth asset.

5 forces that favour lower ASX returns under indexation

1. Domestic policy risk

The new regime would’ve been hated either way, but the fact is the Albanese government did not take it to an election and if it did, backers of these changes could at least point to that. There is concern that there could be more negative tax changes to come, specifically those that will cause ASX earnings growth to slow. International equities are insulated from Australian policy shocks. This matters because the ASX is unusually exposed to domestic regulation, including APRA for banks, environmental approvals for miners, emissions policy for energy companies, and competition scrutiny for supermarkets. If policy risk rises, relative returns fall.

2. Australia being lower growth

If domestic productivity, migration, or business investment weakens (and in all likelihood it will given the lack of genuine productivity measures), Australia’s GDP growth may lag the United States, India, or parts of Asia. Lower GDP growth translates directly into lower earnings growth. Over the past decade, the ASX has delivered an annualised return of roughly 8–9%, while the S&P 500 has delivered 11–12%. Some of that gap reflects sector composition, but some reflects growth differentials. If the new regime dampens domestic investment, that gap may widen.

3. The ASX’s structural concentration

The market is dominated by a handful of sectors, including four major banks, two major miners, and a small cluster of energy and telco names. This concentration limits exposure to high‑growth industries. International markets offer access to artificial intelligence, semiconductors, biotech, cloud infrastructure, and global consumer platforms, all of which have higher long‑run return potential. If indexation reduces the after‑tax return on capital gains, investors may prefer global growth over domestic concentration.

4. The potential for a stronger Australian dollar to compress ASX export earnings.

If the new regime boosts commodity exports or tightens fiscal settings, the currency may appreciate. A stronger Australian dollar reduces the profitability of miners, energy producers, and exporters, which are the core of the ASX. International equities, by contrast, benefit from a stronger Australian dollar because offshore assets become cheaper to accumulate.

5. The rising value of international diversification.

Given the reasons above, investors may seek global earnings streams. International equities provide geographic and currency diversification that the ASX cannot match. In a world where policy risk is rising, diversification becomes a return‑enhancing strategy.

How indexation interacts with inflation: the numerical reality

To understand how indexation changes the picture, it helps to look at the historical relationship between ASX returns and inflation. Over the past thirty years, the ASX 200 has delivered an annualised total return of roughly 9.2%. Inflation has averaged about 2.5%. The real return has therefore been roughly 6.7%.

Under the 50% CGT discount, an investor realising a long‑term gain paid tax on half the nominal gain, effectively taxing both the real return and the inflation component. Under indexation, the inflation component is removed before tax is applied.

If an investor earned a 9% nominal return in a year where inflation was 3%, the taxable gain under indexation would be 6% rather than 9%. At a 47% marginal rate, tax under the 50% discount would be 47% of 4.5%, which is 2.115%. Under indexation, tax would be 47% of 6%, which is 2.82%. In this example, indexation results in higher tax because inflation is low relative to the discount.

If inflation is higher, say 6%, the picture flips. The nominal return is still 9%, but the real return is 3%. The taxable gain under indexation becomes 3%. Tax is then 47% of 3%, which is 1.41%. Under the 50% discount, tax remains 2.115%. In this environment, indexation results in lower tax.

This is the crux. The relative attractiveness of ASX equities under indexation depends on the inflation regime. When inflation is low, the 50% discount is more favourable. When inflation is high, indexation becomes more favourable for Australian equities. And so for now the answer to the question: Are Australian equities appealing compared to other asset classes amidst the CGT changes? is ultimately…yes.

Conclusion: the return‑relevant tension

The new CGT regime forces investors to think in real terms. It rewards assets that deliver income, pricing power, and inflation resilience. It penalises assets that rely on capital appreciation in a low‑inflation world. ASX equities sit at the intersection of these forces. They benefit from franking, inflation‑resilient sectors, and domestic capital flows. They suffer from concentration risk, policy exposure, and a growth profile that may lag global peers.

If inflation remains elevated, indexation may reduce the tax burden on real gains, making ASX equities relatively more attractive. If inflation falls back toward target, the 50% discount would have been more favourable, and international equities may regain their edge.

The ultimate point is that the attractiveness of ASX equities under indexation is not fixed. It is conditional on the inflation regime, the policy environment, and the investor’s appetite for domestic versus global growth.