Analysts say proposed capital gains tax changes could steer investors toward dividend stocks while penalising growth companies.

Big increases in capital gains taxes payable on share sales rumoured to be introduced in Tuesday’s Federal Budget will push investors into dividend stocks at the expense of tech or other growth companies, according to analysts.. On Monday, UBS equity strategist Richard Schellbach said Tuesday’s Budget could be the most important in years, as growth stocks lose appeal due to the perception that shareholders will have to wear the risk of losses and pay higher

taxes on any capital gains.. “Usually budgets have little impact on the equity story, however these speculated tax changes could matter in terms of altering incentives and shifting flows,” said Mr Schellbach.. The Budget is expected to abandon the 50 per cent discount on capital gains for investments held for more than 12 months in favour of higher taxes on any profits linked to inflation.. “If, as speculated, the 50 per cent capital gains tax

(CGT) discount is removed and replaced with some form of inflation indexation, investments which are motivated by capital gains would become somewhat less attractive,” said Mr Schellbach.. Growth-style companies listed on the share market that reinvest capital to grow their operations are the most vulnerable to a hit from the government’s proposed changes, according to Mr Schellbach.. Those companies that tend to pay out profits as income in the form of dividends are the least

vulnerable as the potential changes will not impact taxable income, the analyst added.. Australia’s existing franking credit rules introduced in 1987 that offer tax refunds or offsets attached to dividends paid is another additional benefit to income investors, according to the equities strategist.. “This policy increased the appetite of investors towards dividend payers,” Mr Schellbach said.. “Although we’re not foreseeing changes to the dividend imputation system in this year’s Budget, it stands as an example

of how long term trends can be set in motion following tax policy changes.” The analysts thinks investors should avoid real estate and discretionary retail stocks due to a mix of budget pressures, rising interest rates, and cost-of-living worries.. He also warned growth-style companies in the tech and biotech sectors such as Telix Pharmaceuticals, Xero, Hub24, REA Group, Life360, and WiseTech are most at risk from reduced investor due to the tax changes penalising investors..

While companies that pay fully franked dividends favoured by retirees such as the banks, utilities, and infrastructure plays are most likely to benefit.. On Monday, the flagship S&P/ASX 200 Index closed down 0.5 per cent to 8701 points.. It’s down 0.3 per cent year to date.. Among its sub-sectors, the high-growth S&P/ASX 200 Information Technology Index has plunged 31 per cent over the last 12 months amid worries over rising interest rates and disruption from

technologies linked to artificial intelligence.. Proposed changes could boost property prices, cost young investors Currently, share market investors only pay applicable income tax rates on 50 per cent of profits from share market investments held for more than one year.. At the top income tax rate of 45 per cent this is equal to an existing capital gains tax rate of around 23 per cent, although it varies slightly depending on total income earned in

any tax year.. On Monday, Christopher Joye the chief investment officer and founder of Coolabah Capital warned the touted Budget changes will hurt productivity, as a measure of economic output, the share market and residential property renters.. While boosting owner-occupier house prices as a benefit to asset rich older generations.. “After The Budget doubles, the capital gains tax on productive businesses/assets from circa 23.5 per cent to 46-47 per cent, investors will understandably pull money

from businesses, shares, commercial property and rental housing and plough it into their tax-free owner-occupied home,” Mr Joye said.. “It’s a great way to push up the prices of these houses.. On the other hand, cutting negative gearing while also doubling CGT makes investing in rental properties extremely unattractive.” AMP’s chief economist, Dr Shane Oliver, also joined a chorus of disapproval about the proposed changes.. Dr Oliver warned the proposal to lift taxes on share

market profits will cost younger investors, more than older investors.. “Unfortunately, I can’t see how these [proposed changes] will improve intergenerational equity,” Dr Oliver said.. “Older generations have got the benefit of these tax concessions to grow their wealth and now they are being curtailed for the young!” Treasurer Dr Jim Chalmers will make a speech on the Labor Government’s Budget at 7.30pm on Tuesday.

capital gains tax forecast, dividend stocks, Federal Budget, growth companies, franking credits, S&P/ASX 200, property renters