The first week of June traditionally signals the start of a tax-loss selling wave across the Australian share market, as investors offload underperforming stocks to crystallise losses. This strategy allows them to offset capital gains elsewhere, a method MST Marquee data shows has been successful 72 per cent of the time since 2000. However, this year’s season may unfold differently due to proposed federal capital gains tax (CGT) rule changes. From July next year, the 50 per cent capital gains discount will be replaced with an inflation indexation model, meaning capital losses will no longer be indexed.
MST Marquee analysts suggest investors might delay selling underperformers until the new rules take effect next financial year. This strategy aims to preserve losses, potentially worth more under the inflation-indexed regime, thereby reducing future tax bills more significantly. Senior research analyst Hasan Tevfik noted investors could see greater tax savings by waiting, potentially making this year’s and next year’s tax-loss selling seasons more muted. However, Tevfik also cautioned that negative commentary could lead to the proposed CGT changes being scaled back, possibly to residential property only.
The impact of tax-loss selling is typically most pronounced among smaller companies with high retail investor ownership. Consumer discretionary stocks, including Bapcor, G8 Education, Temple & Webster, Myer, and Accent, are highly vulnerable, having slumped over 50 per cent since last June amidst inflationary pressures and rising interest rates. Bell Potter’s Richard Coppleson observes institutional investors often sell small-cap laggards from mid-May, while retail investors typically act in late June. Macquarie analysts highlight a historical trend where June is often a low-returning month for the Australian share market, with investors exhibiting risk-off tendencies before a more positive July rally.
