The tax system has made franked dividends worth more

Reece Birtles, head of Australian equities at ClearBridge Investments, argues the tax system has made that ordering an expensive one. Advisers have one reporting season left to work out which clients depend on selling assets rather than franked dividends to fund their spending.

The change is settled law, having passed the Senate on 25 June 2026. From 1 July 2027 it removes the 50 per cent CGT discount for individuals, partnerships and trusts, replacing it with indexation of the cost base. A minimum 30 per cent rate applies to net capital gains, which bites hardest on clients who sell down assets at concessional rates to meet living costs.

The detail runs further than the headline. Assets acquired before 20 September 1985 face a deemed disposal and reacquisition on 1 July 2027, resetting the cost base to market value, and indexation covers resident individuals and trusts rather than companies, superannuation funds or life insurers.

Birtles puts the consequence in cash flow terms rather than tax terms.

“For an investor drawing an income from a portfolio, owning companies that generate resilient cash dividends means they are less reliant on selling assets and realising capital gains that attract capital gains tax (CGT) to meet their spending needs,” he says.

Income risk belongs in its own category

Birtles keeps returning to the point that a retiree and an accumulator face different risks from the same portfolio. An accumulator measures risk through movements in capital value. An income investor carries three others, namely that the income proves too low, that it fails to keep pace with inflation, or that too much of it rests on one company or sector.

That changes the shape of a portfolio review. A strong total return still counts, but Birtles wants advisers to ask how many dollars of income the portfolio produced, and whether that figure grew on last year. ClearBridge says approximately two-thirds of the total returns from its Australian Equity Income strategy, launched in May 2010, and its Ethical Income and Sustainable Income strategies, launched in December 2015, have consistently come from franked income streams.

The after-tax case, and where it could fail

ClearBridge’s internal analysis suggests that for investors drawing income from Australian equities outside superannuation after 1 July 2027, the prospect of paying top-up tax each year on realised gains makes fully franked dividend payers more capable of producing better after-tax income than no- or low-dividend compounders. The larger final gain on selling a non-dividend payer compounds the effect.

Advisers should treat that as a modelled outcome rather than a settled result, and it carries two conditions worth naming. Franking credits only help clients who can use them, which puts the argument on firmer ground for a retiree with low taxable income than for a client still working. And dividends carry no contract, as 2020 demonstrated when APRA told the banks to cap their payouts and Australian dividend income fell hard in the year income-dependent investors needed it most.

Birtles does not argue the tax change alters the underwriting. He still wants businesses with strong free cash flow, pricing power and resilient earnings that can support dividends through the cycle and grow them over time, and he reads the tax change as reinforcing the case for selectivity rather than altering it.

Why dividend growth does more work than a high yield

Low rates gave equity income a starting advantage over cash and bonds for a decade and a half. That advantage has narrowed, and Birtles wants the conversation moved from the level of income to its growth rate. A fixed-income security delivers a known coupon and lower capital volatility, and that coupon stays where it is.

Speaking in August 2026, he put dividend growth across ClearBridge’s portfolio of quality defensive Australian equities at 7 to 8 per cent a year, against periods in the past when it ran closer to 3 per cent. The inflation backdrop has firmed since, with the Reserve Bank lifting the cash rate to 4.85 per cent on 3 November 2026, its fifth increase of the year and the highest setting in 18 years. An argument resting on pricing power and growing distributions reads better against that than against a cooling one.

The other habit Birtles wants revised is the hunt for a high headline yield.

“A high yield can sometimes be a warning rather than an opportunity.”

When the market expects an earnings squeeze or a dividend cut, the share price falls and mechanically lifts the yield, so the screen flags the stock at the worst possible moment. ClearBridge instead tests the cash flow behind the payment, looking for durable earnings, pricing power, strong free cash flow and the capacity to keep paying and growing through different conditions.

The index was never built to pay an income

Birtles reserves his bluntest line for advisers who use the benchmark as a proxy for an income allocation.

“Don’t mistake the index for an income portfolio as the S&P/ASX 200 is not constructed to provide an investor with a diversified income stream,” he says. Market-capitalisation weighting skews it toward banks, and yield-focused smart beta indices carry the same skew, since the banks have long anchored the high-yield end of the market.

He asks advisers to consider a client with around 30 per cent of an equity allocation concentrated in banks, then a domestic downturn that lifts bad debts. He noted signs of exactly that in the early part of the August 2026 reporting season. A large part of that client’s dividend income would carry the same correlated risk, and income-dependent investors need considerably more diversification than that.

Turning defensive too early carries its own cost

The last risk Birtles raises runs in the opposite direction to the others. Advisers de-risking a client at retirement can strip out the growth that protects the capital base, and where a defensive portfolio produces a total return close to the drawdown rate, too little growth remains to protect the capital and its future income against inflation.

An income stream large enough to cover spending buys the client the ability to hold growth assets through a bad market, which is where the tax change and the portfolio construction question meet.

“And for younger retirees in particular, time is still on their side,” Birtles says. “A temporary equity market dislocation does not necessarily have to change the long term investment strategy if the portfolio continues to generate the income they require.”

One reporting season now stands between advisers and the new rules. February 2027 is the last read on which client portfolios pay the bills from cash flow, and which ones pay them by selling something.