Wilson Asset Management founder Geoff Wilson says Labor’s capital gains tax will see investors chase dividends

Labor’s plan to impose a minimum 30 per cent capital gains tax on shares will see investors put their money into stocks that pay high dividends instead of innovative technology companies that could make Australia more productive, a veteran fund manager says.

Wilson Asset Management founder and chairman Geoff Wilson said investors would be so worried about a big tax on their capital gain they would end up putting their savings into high-yielding stocks, like the big supermarkets, banks and utility companies, instead of ones that had the potential to soar in share price.

“They won’t want capital growth. They’ll want dividends. Dividends are more favourable — you don’t get penalised; you don’t have to pay a minimum of 30 per cent on your dividends,” he told The Nightly.

Last week’s Budget proposed to replace the 50 per cent capital gains tax discount, introduced in 1999, with a minimum 30 per cent tax on real capital gains from July 2027.

“It’s just ridiculous. What it does, you’re actually penalising making capital gain,” Mr Wilson said.

Unlike the 2019 election, Labor isn’t proposing to scrap franking credits, or tax refunds, for retirees who receive dividends from companies that have already paid company tax.

Mr Wilson said this group living off their dividends, who stood to lose the most seven years ago had Labor won that election, would be particularly reluctant to invest in shares that could potentially get a lot of capital growth.

“If you’re a low-income earner, if it’s fully franked, you get the franking credit back,” he said.

“But if you’re a low-income earner and you make a capital gain, you pay a minimum of 30 per cent.”

A big tax on capital gains would see investors increasingly buy shares in the likes of supermarket giants Coles and Woolworths and the big four banks, Capital.com market analyst Kyle Rodda said.

“You’re looking at consolidated names like the banks potentially, like the supermarkets potentially, the miners to a lesser extent because they’re quite cyclical,” he said.

“The defensive names, basically, businesses that already exist, they already have established cash flows, they already have met their full growth potential and they’re just paying out income streams; they tend to be big, they tend to be boring.”

With Australia in the grip of a productivity crisis, the disincentive to invest in innovative, technology stocks could also see Australia left behind in the AI revolution as start-ups moved overseas.

“The bigger issue will be those new companies that hit the market that might be hit by CGT which may disincentivise future investment and actually create a new asset for people to invest in,” he said.

“Maybe, start-ups are going to be taxed in a fairly similar regime which could stifle innovation.

“If you’re disincentivising that, not only are you hurting investors, you’re hurting the long-term prosperity of the country.”

AMP’s head of investment strategy Shane Oliver said high-yielding, defensive stocks like telco Telstra and utility companies would also be popular with investors trying to avoid a capital gains tax bill.

“Basically, what the tax change does for the share market is that it could bias investors towards high-yielding shares, particularly stocks paying good, franked dividends,” he said.

“They tend to be older, well-established companies but it would work against smaller, growth-oriented companies because investors are going to get a lower, after-tax return, potentially from growth stocks because of the higher, likely capital gains tax rate and therefore they’ll probably want to get more of their return from income — dividends or franking credits.”

Dr Oliver said this would see less capital flowing towards start-ups.

“The problem with that, of course, is that it can mean investors becoming less risk oriented — we really do need more investment in Australia and ideally we need more capital for new start-ups, new businesses, young companies, newly-listed companies on the share market and this, to some degree, will work against that,” he said.

Treasurer Jim Chalmers has argued replacing the 50 per cent CGT discount for a range of assets, would see investors focus on economic outcomes instead of tax concessions, and promised to consult the start-up sector.

“We can recognise that start-ups can be a bit of a different case in the tax system. If we can find a way through there that would be good,” he told podcaster Ruby Jones on Thursday.

But Mr Wilson said the proposed new tax on Australian Securities Exchange-listed companies, exchange traded funds and listed investment corporations was “grossly flawed” and “stupidity of the highest order” — despite the upside benefit to his company managing $6 billion in assets for 130,000 retail investors.

“Whether it will be holding high-yield assets, whether it will be investing in shares that have a high yield, the Budget proposal is really good for our business Wilson Asset Management because we manage listed investment companies that yield between 8 and 12 per cent,” he said.

During the 2020s, tech stocks like buy now, pay later app Afterpay and location app Life360 had seen some of the sharpest share price increases with investors overlooking earnings and focusing on potential growth.