And here we go again. More proposed superannuation changes.
The Albanese government is planning to impose a higher tax rate on superannuation balances above $3 million. This is set to take effect from July 1, 2025, and has been sold as increasing fairness and sustainability in the system. However, it just adds to the complexity, specifically with the most alarming of the proposed changed: taxing unrealised gains.
The main component of the proposed reform, known as the Division 296 tax, is to increase the tax on earnings in the accumulation phase of super from 15% to 30% for balances above $3 million. As we know, super funds are taxed at a concessional rate of 15% on earnings during the accumulation, while earnings in pension mode are tax-exempt. The proposal targets earnings on the portion of a super balance exceeding $3 million, leaving the first $3 million taxed at the existing 15% rate. If an individual has a $3.5 million super balance, the earnings on the additional $500,000 would be taxed at 30%.
The estimates suggest this will affect 80,000 Australians, or 0.5% of super account holders. The wealthiest of super account holders. The move is projected to generate $2.3 billion in revenue in the 2027-28 financial year and $40 billion over a decade. The government argues they need funds for budget pressures in areas such as defence, health, aged care, and the National Disability Insurance Scheme, an area where spending has now exceeded all previous forecasts.
If a government is going to increase tax, they’re going to increase tax. There is nothing we can do about it, but they should at least make it simple and logical.
The Real Concern
This brings us to the truly concerning and bewildering part of the proposal: taxation of unrealised capital gains.
These are the gains on assets that have appreciated in value but have not been sold. Essentially, you’ve bought an asset for $10 grand. It goes up 50%. It’s now worth $15 grand. You haven’t sold it, but the government still wants their cut.
This is a significant departure from traditional tax practices in Australia. Traditionally, capital gains are taxed when they are realised, e.g., when something is sold and you actually have the proceeds from the sale.
The argument against taxing unrealised gains is that it may force individuals into a crash crunch - most likely those with self-managed super funds who hold illiquid assets like property, business premises or farms, or any unlisted illiquid asset. They will potentially struggle with liquidity, and be forced to sell assets to meet tax obligations. The government has attempted to mitigate this by extending the payment period for tax liabilities from 21 days to 84 days, but more time doesn’t exactly alleviate the core issue of taxing something an investor hasn’t yet realised.
Non-Indexation of the Threshold
The other point of contention is the $3 million threshold, which has no indexation. The lack of indexation suggests that, as balances grow with contributions, wage inflation and compounding, more investors will be hit by it. Analysis by AMP Capital suggests that in 40 years, at least half of today’s Gen Z could have super balances exceeding $3 million by retirement, and a simple compounding calculator shows that to be true. While we obviously disagree with the lack of indexing, forecasts about the impact in 40 years down the track is incredibly speculative when there’s more immediate concerns.
Australia’s largest super funds, AustralianSuper and Australian Retirement Trust, have lobbied Treasurer Jim Chalmers to index the $3 million threshold to inflation. Their argument is that a static cap may destabilize the system and undermine confidence among savers. Some Independent MPs like Allegra Spender are urging a rethink, highlighting the complexity and fairness. Less concerned about fairness and complexity, the Greens, with the balance of power in the Senate, have suggested lowering the threshold to $2 million.
The Real Winners?
The irony is, it’s us. Financial advisers. Further complexity, mixed with panic in superannuation, generates work for financial advisers. Even before anything is legislated, wealthy retirees and high-income earners are already wondering how to avoid the tax, should they sell assets, restructure portfolios, or redirect contributions to non-super investments like trusts or property? There’s been talk that high earners in their 40’s have ceased additional contributions to SMSFs due to uncertainty about the policy’s long-term implications.
Changes Prompt Misinformation
This has also come at a time when there’s been a flood of misinformation around superannuation changes (see video from our colleagues) around withdrawal rules starting on June 1, 2025. The proposed tax changes are not accompanied by any changes to withdrawal rules.
The misinformation, which is spreading via dodgy websites and emails, has caused plenty of confusion. Some people are now believing the $3 million tax proposal also affects access to their super savings. The ATO has clarified that the proposed tax does not alter withdrawal or preservation rules.
The Lack of Resistance
The interesting thing about all this was the very limited resistance the federal opposition put up to this proposal in the lead up to the recent federal election. This was in significant contrast to previous Labor proposals such as limiting negative gearing and ending franking credit cash refunds, where the Liberal/National Coalition was incredibly vocal. Awareness campaigns that arguably helped them win the 2019 election.
A cynic may wonder, given superannuation isn’t a scheme much favoured by the Liberal/National Coalition (or no Coalition as it is at the moment) given the largest savings pool is dominated by industry funds with union-controlled boards, are they happy to give Labor enough rope? Don’t interrupt your enemy while making a mistake. This proposal has already led to people not adding money above their employer mandated contributions. A good outcome if you weren’t in favour of compulsory superannuation, and were happy to see further complexity and doubt cast.
The arguments of proponents “don’t worry, it’s a small amount of people”, “it can be indexed in the future” miss the point that a key component of any age restricted savings vehicle is trust. There’s always been the conspiracy voices screaming “it’s not your money, the government will swipe it someday”. And while that’s outlandish, it is a captive pool of money. If something can be changed for the better, it can also be further twisted for the worse.
If this affects you, first and foremost, avoid knee-jerk reactions. Nothing is yet law, and it must first pass through parliament and legislation is subject to change via trade-offs and negotiation. Labor may actually be aiming for something less, so they’ve pushed a more extreme proposal so it can be negotiated back to what they really want. Keep in touch with your adviser if it’s likely to affect you, and make sure you’re across updates as the legislation progresses.
Unfortunately, as we’ve repeatedly stated over the years, the biggest risk with superannuation is legislative risk.
That remains the case.
This represents general information only. Before making any financial or investment decisions, we recommend you consult a financial planner to take into account your personal investment objectives, financial situation and individual needs.
With thanks to FFYG for this article