Budget changes force a new course for young investors
Idea
When the budget was reached in May, I was starting a book. social media series I talk to my 22-year-old daughter about how we can give our adult children a great start in life without giving them a wad of cash.
Since returning from hiatus last year, she has been learning the basics of budgeting, saving and investing at the kitchen table with me. And she’s working hard, studying, and saving money to achieve her next big goal: buying her first home.
We’d done the math, and he was pretty confident that when he graduated from college next year, he could spend a few years living in our parents’ house, accumulating a healthy deposit, investing diligently, and be ready for his first property venture within a year or two of graduating.
He had planned to get on the housing ladder by the age of 25, albeit in an investment property, because it was nearly impossible to buy an apartment on a graduate teacher’s salary that he could afford to pay the mortgage on while living there as a single person.
He would then take the time to live in the house and see if he could build some equity in this investment property that he could then use to purchase his first real home.
Then came the federal budget and this strategy became completely unworkable.
But this isn’t actually a story about tax change or growth rates. It’s a chance to rethink what ‘helping your children’ really means.
The budget changed two fundamental things. For established properties purchased after May 12, 2026, rental losses can no longer be offset against salaries or wages; offset only by rental income and final capital gains; This is a huge blow to young buyers who have no investment income to offset.
And it changed the application of capital gains tax on all assets held outside superannuation from a 50 per cent discount on assets held for one year, replacing it with a 30 per cent minimum tax on real gains from 1 July 2027. Almost every generation is affected, but few more so than those who haven’t even started life yet, like my daughter.
Before budgeting, my daughter, if she saved a healthy deposit, could borrow between $700,000 and $750,000 and buy a rental property that gave her a pretty wide range of options. In the early years when he couldn’t afford to live in it, he could buy a house or townhouse that he could grow into and rent out.
This is a strategy that provides generous returns to investors. In the last five years alone, home values have increased by 40 percent across the country.
Now, with the elimination of the pay cut on established properties, borrowing capacity has fallen to between $500,000 and $550,000. It can still benefit from the government’s 5 per cent deposit incentive, but that means taking on more leverage, not less, at a time when the property market is showing serious signs of softening.
He/she must also live in the property for at least the first six months, depending on the schedules, to be eligible for any incentives. At this price point, he’s actually only looking at smaller properties, which have a much narrower shot at the kind of growth he’s hoping for. So the investment property route is off the table, and the owner-occupier conversation will likely be off the table for a long time, too.
And here’s the part that makes all this difficult to plan. Historical growth figures for property (40 per cent growth rate over the last five years) were generated at a different part of the interest rate cycle under the old rules, with the old negative gearing settings, with the old CGT discount motivating buyers. No one can now say for sure what the next five years will look like.
Then you look at other ways it could progress. If he had invested in exchange-traded funds, he would have had the opportunity to benefit from healthy growth rates earlier. Over the last five years, Australia’s largest and most popular ETFs have returned close to 8 per cent a year for a broad Australian share fund like VAS and close to 13 per cent for a global share fund like VGS.
Under the old rules, which lasted more than 12 months, half of the profits from the sale of these units were tax-free. Under the new rules, this deduction disappears and is replaced by inflation indexation and a 30 percent minimum tax on real earnings.
For a young investor, this means a significantly larger tax burden down the road. Modeling predicts real returns of close to 6.5 per cent per year for Australian shares and around 10 per cent per year for global shares when the new tax comes into effect. This growth rate in Australia is hardly an incentive to invest in your country at a time when banks will give you 5.5 per cent in cash.
But this isn’t actually a story about tax change or growth rates. It’s a chance to rethink what ‘helping your kids’ really means and separate money from mentoring, because you can absolutely do both – and they need both now more than ever. Unless the rules change, one thing is almost certain: Growth will be slower.
That’s why we need to go back to basics.
My daughter still wants to own a home someday so she has a place to live that grows over time and she still gets the extremely valuable primary residence tax exemption.
And he still needs to get a financial start in life and use compounding to get ahead. We look at the logic and it says we need to separate the two when they could have been brought together before.
Therefore, from now on, we learn two things separately: To put down a deposit for the house he will live in one day; and we invest for growth.
Making deposits, clearing decks
His first move after the budget was to transfer his savings from ETFs to his pension fund using the First Home Super Savings Scheme.
It’s a sexy little structure for anyone saving for a home, allowing voluntary concessional contributions of up to $15,000 a year and $50,000 over a lifetime, taxed at 15 percent instead of the marginal tax rate. It’s all about letting it in and letting it grow while you’re living at home and expenses are low.
What most people don’t realize about FHSSS is that it comes with two tiers of tax concessions, not just one, and the real risk protection is in the second tier. Digging in, that 15 percent tax is why only 85 percent of his contributions count toward the amount he can eventually release.
This comes out to be 85 percent plus the ATO’s own share accepted as profit rateRegardless of the performance of its actual investments, which is currently 7.43 percent for July-September 2026, it is added to its income and taxed again at its marginal rate, less the 30 percent tax offset (remaining growth remains super).
Assuming her marginal tax rate as a teacher is 32 percent, including Medicare, this second tier would correspond to her paying about 2 percent in taxes. In all, he would have paid around 17 percent total; This was well below what he would have paid if he had simply saved and invested in his own name, and his returns had a safe basis even if markets fell.
That $42,500 plus counting earnings is a good start. We will be able to save more while living at home, which means we need to learn to invest.
Investing for growth
Once the FHSSS limits are exhausted, the conversation shifts from using a smart tax structure and safe rates of return to something harder and more important: actually learning to invest.
This is where we spend a lot of time at the kitchen table because, unlike super, there is no plan operating on its behalf here and the property is no longer an easy leveraged growth target.
He needs to understand what he is buying, how it is taxed, what his goals are for the time frame and returns. For much of the money he saved beyond his FHSSS contributions, we ended up in low-cost ETFs held in his name; It’s a mix he can choose to weigh in on Australian and international markets.
At this stage in its life, with decades ahead and a low marginal tax rate, holding growth assets makes sense. Yes, the arrival of CGT changes means he’ll end up paying more tax than he would under the old 50 per cent discount scheme, but even with that adjustment, it’s better to own growth assets and pay tax once on exit than hopefully still sitting on cash and succumbing to inflation every couple of years.
What’s more important than any individual investment product is that he learns to make those calls himself, reads a brief, understands what he has, and knows why he chose it. This is worth more than any cash benefit given at age 22.
Bec Wilson is the bestselling author How to Have an Epic Retirement and new releases Prime Time: 27 Lessons for the New Middle Life. Writes a weekly newsletter epicretirement.net and hosts prime time podcast.
- The advice given in this article is general in nature and is not intended to influence readers’ decisions about investments or financial products. They should always seek their own professional advice, taking into account their personal circumstances, before making any financial decisions.
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Bec Wilson is the author of How to Have an Epic Retirement and writes a weekly newsletter for pre- and post-retirees at epicretirement.net.
