Prime Minister Albanese’s decision to tax capital gains the same as income has caused consternation, confusion and perhaps even a little chaos for people with significant assets. Add in the bans on negative gearing and the minimum thirty per cent tax on trust distributions and people have a major challenge.

Some small businesses are owned by trusts. Many trustees will want to restructure, from family trusts to companies for example. Others may want to set up new trusts for disabled people separate from existing family trusts as they would escape the tax.  

These restructures could incur large stamp duty costs. The Australian Small Business Ombudsman has said the Federal Government should provide stamp duty concessions for these restructures. 

For people who hold investments outside of superannuation, what to do next is a serious question. The new tax makes potentially high growth, high risk investments much less desirable. If people pick a share that doubles or triples in value over a year or two nearly all the gain will be taxed.

Investments of lower risk that provide a sound income and grow more slowly become much more attractive. The rules penalise risk takers, especially those who build new businesses from scratch.

Managed funds are likely to be one of the beneficiaries of the new rules. Most fit into the category of lower risk, providing an income, with lower growth. They hold many assets in the category they invest in, meaning lower risk than if one owns a single asset.

For example a share fund owns shares in many companies, making it safer than picking an individual share. The dividends paid by the companies the fund has invested in are passed through to investors, with imputation tax credits if applicable.

In addition, managed funds usually pay their investors more than just the dividends they receive. They also pay out realised capital gains with their income distributions.

If the fund managers have bought something that has made a strong gain and they decide to sell it, the realised gain must be assessed for tax in the hands of the investor, so it is paid out to them rather than being reinvested.

Unrealised gains are not paid out, meaning the funds usually still grow in value, but more slowly. So funds typically have lower risk, good income and moderate growth. That is appealing under the new capital gains tax rules. Investors can reinvest the distributions to boost their account growth if they wish.

If possible, adding to superannuation is the best response to the new tax rules. If that’s not possible, managed funds could be a good choice.