Tax on Superannuation Unrealised Gains

A growing number of Australians may soon find themselves impacted by the controversial Division 296 tax, as the Labor Government pushes forward with legislation that includes taxing unrealised capital gains in superannuation accounts exceeding $3 million.

Despite initial claims that the policy would affect only 0.5% of the population—around 80,000 individuals—experts warn that the lack of indexation means many more Australians could be swept into the tax net, according to AMP analysis, this will affect the average Gen Z by the time they’re 59 thanks to inflation.

A Policy on the Move

Following Labor’s landslide victory in the House of Representatives and a favourable Senate composition, Treasurer Jim Chalmers has confirmed the government’s intent to reintroduce the Superannuation (Better Targeted Superannuation Concessions) Imposition Bill. While the tax was originally slated to begin on 1 July 2025, delays in parliamentary sittings mean it may be applied retrospectively if passed.

The policy imposes an additional 15% tax on earnings—including unrealised gains—on super balances above $3 million. This means Australians could be taxed on paper gains, even if the assets haven’t been sold.

How It Works

The tax applies only to the portion of a super balance exceeding $3 million. For example, if an individual has $4 million in super, the tax is calculated on the $1 million excess. The calculation excludes contributions and includes withdrawals to isolate actual fund growth.

Losses can be carried forward, but there are no discounts for long-term holdings, raising concerns about potential double taxation when assets are eventually sold.

The Indexation Issue

Critics argue that the fixed $3 million threshold fails to account for inflation or wage growth. AMP Deputy Chief Economist Diana Mousina has modelled scenarios showing that even average income earners in their 20s could exceed the cap before retirement.

Meanwhile, the tax-free pension threshold—currently $1.9 million and set to rise to $2 million in July—is indexed, creating a growing disparity in tax treatment.

SMSFs in the Crosshairs

Self-Managed Super Funds (SMSFs), which often hold higher balances and illiquid assets like property, are expected to bear the brunt of the policy. Unlike APRA-regulated funds, which already account for unrealised gains in their tax calculations, SMSFs may face liquidity challenges, potentially forcing asset sales to meet tax obligations.

Impact on Investment Strategy

The policy could significantly alter how Australians invest their super. Industry groups warn of a shift away from illiquid investments like venture capital and property toward more liquid assets. The Tech Council of Australia estimates that SMSFs contribute around 25% of venture capital funding—a figure disputed by former Assistant Treasurer Stephen Jones.

Global Comparisons and Alternatives

While Australia’s move may seem unprecedented, similar taxes exist elsewhere. Norway, for instance, taxes unrealised gains, a policy that has reportedly led to capital flight and reduced investment.

Alternatives to the current proposal include taxing only realised gains above the threshold, applying additional taxes on large withdrawals, or even introducing an inheritance tax—though the latter remains politically sensitive.

What Can Investors Do?

Investors are advised to prepare rather than wait for potential changes. Strategies include:

• Seeking advice from your Financial Adviser

• Working with tax professionals to offset gains with losses

• Planning for liquidity needs, especially for illiquid assets

For now, Australians must brace for a shifting superannuation landscape—one that may affect far more than initially anticipated.

‍

‍