$3 million in a super is a lot – until it isn’t.

The landslide election of the Labor Government in the House of Representatives and the composition of the Senate means that there’s not much standing in the way of the implementation of the extended Division 296 Tax Liability. This includes the taxation of unrealised capital gains in superannuation. Federal Treasurer Jim Chalmers has confirmed that the Party does intend to introduce the stalled bill again.

This tax was originally supposed to come into effect on 1 July 2025, but with the Senate composition only just formed, this looks unlikely. Additionally, Prime Minister Albanese is not planning to recall Parliament until August. The tax, outlined in the Superannuation (Better Targeted Superannuation Concessions) Imposition Bill, would have to be applied retrospectively if successful.

This unrealised capital gains tax is only applicable for balances over $3 million. This makes it tempting for many Australians to ignore the policy that allegedly only impacts 0.5% of the population or 80,000 people. Many Aussies are already opposed to the new tax. The ranks of opposition may grow as the omission of indexation means more Aussies will be impacted as time moves on.

Let’s go through the policy, it’s impacts and who it will affect.

What is the policy?

Let’s start with explaining how this policy is supposed to work.

The tax will apply to individual super balances over $3 million. There is an extra 15% on top of the existing tax on earnings but will include both realised and unrealised capital gains.

A tax on unrealised gains means that you are taxed on an increase in the value of assets even if it is just a paper gain. An asset does not have to be sold for this gain to be taxed.

An example of an unrealised capital gain is a property in your superannuation fund that you purchased for $500,000 which has grown in value in the next financial year – on paper – to $600,000. Even though you have not sold this asset, the gain is taxed.

There are some nuances to this tax. The tax is calculated on net earnings, and not on individual holdings. Simply, it is based on the gain at the portfolio level. The gains and losses are netted off at this level. If your portfolio gains in value, you will pay tax. If your portfolio loses value, you will not pay the tax.

Former Assistant Treasurer Stephen Jones was adamant that this will be a minimal change for the majority. He also confirmed that losses can be carried forward to offset future gains. However, the policy lacks capital gains discounts or adjustments for time held, and no consideration for when gains will actually be realised.

This means that there’s likely double taxation when the asset is disposed of. This tax presents fundamental issues for investors that will lead to changes in the way that Australians invest in their super. More on this soon.

How it’s calculated

It’s important to start with the fact that this policy is for the proportion of an investor’s balance above $3 million. To determine how much tax is owed the first step is to calculate the percentage of earnings that are attributable to this portion of the portfolio. The tax is across your Total Superannuation Balance (TSB).

The proposal stipulates that your TSB does not include any Limited Recourse Borrowing Arrangements (LRBA). If you have $4 million across your accumulation and pension accounts, you calculate the earnings on $1 million.

However, what the number should not include is contributions or withdrawals. The purpose is to capture the growth of the fund, so withdrawals are added back in, and contributions are removed for the purposes of the calculation.

Last year’s adjusted number is then subtracted from this year’s adjusted number. If your fund was at $3.8 million the year prior (adjusted as above), the tax would be applicable on $200,000. This assumes you do not have any losses that you have carried forward.

If your prior year’s adjusted TSB is below the threshold, it is substituted by $3 million for future calculations.

You can find a detailed calculation that I found helpful at the bottom of this article, that has been taken from the Explanatory Memoranda of the bill.

The problem with the lack of indexation

$3 million feels unreachable for many Australians which explains the lack of mainstream media coverage and outrage regarding this policy. The issue with the policy is that it is a stagnant $3 million, which means that it will capture more and more Australians as they accumulate funds in their super over the long-term.

Deputy Chief Economist Diana Mousina from AMP has modelled this out to show that the average 22-year-old income earner will hit the cap before they hit retirement.

Projected impact of unrealised capital gains

However, the model assumes that there will be no policy reviews or amendments. The government has confirmed that the policy will have a more immediate review in two years to understand the impacts and the practical implications.

I would never suggest that investors should base investment decisions on hopes of policy amendments. Decisions should always be made based on the environment and circumstances that are certain.

What is indexed, however, is the tax-free pension threshold. Currently at $1.9 million, it is set to increase to 2 million on 1 July 2025. This will continue to be indexed. The same 22-year-old in Diana’s model will have a much larger tax-free pension threshold. Although the unrealised capital gains tax will detract from total return outcomes, they will also receive a larger percentage of their fund at a 0% tax rate. There are puts and takes.

This is of course, assuming that superannuation policy does not change.

This policy disproportionately impacts SMSFs

Most high superannuation balances sit in Self-Managed Super Funds (SMSFs) which explains why the loudest voices in opposition of this policy are SMSF Associations.

APRA-regulated superfunds – the everyday superfunds such as AustralianSuper, typically already take tax from their members on unrealised gains. AustralianSuper said in its submission during the legislative consultation process that large APRA-regulated superannuation funds already typically incorporate tax on an accrual basis. This includes realised and unrealised capital gains tax liabilities.

Another point of contention for SMSF holders is that they typically hold a larger allocation to illiquid assets. Having to fund unrealised gains will require forced sale of assets if the members are unable to fund tax liabilities with cash in or out of superannuation.

How this could impact asset allocation of superfunds

One of the major criticisms of this policy is that it will meaningfully change the asset allocation in superannuation. Instead of investing in illiquid assets, investors will instead turn to liquid assets to a greater degree.

Industry bodies are concerned that there will be significant divestment in venture capital investments that fund the Australian companies of tomorrow.

The Tech Council of Australia believes that around 25% of money that goes into venture capital comes from SMSFs. Former Assistant Treasurer Jones has refuted this figure and believes that it sits around 3%. He believes that the most common asset disposal scenario will be for SMSFs holding property.

The likely impact of the proposed tax policy is that large superannuation accounts will have to shift their asset allocation to higher proportions of liquid assets to fund tax bills. Paying tax bills outside of super will be inefficient from a tax and cashflow perspective for most. There are concerns that this will further lower return outcomes in addition to the direct impact of the tax.

Is this policy unique?

Normally tax liabilities are only generated after the sale of an asset. However, there are several dimensions where the proposed policy is not unique. I’ve paid tax on unrealised gains every year that I’ve owned a house – land tax.

Former Minister Jones also adds that there’s taxation on unrealised gains on APRA-regulated funds, and stock-in-trade arrangements on business.

Looking overseas, Wilson Asset Management has conducted research on the impacts of this policy on Norwegians where unrealised gains are taxed. They’ve found that taxation on unrealised gains has negatively impacted the people and industries of Norway. When the Norwegian government doubled the tax on unrealised gains there were large capital outflows.

Precedent alone doesn’t make a policy fair. Regardless of whether this is unprecedented or not, it is a policy that will impact more Australians as we move forward without indexation.

What are the alternatives?

The Government has decided that individuals that have a balance over $3 million in their super should pay more tax. Putting aside whether this is fair, are there better ways the tax could be implemented while raising similar levels of revenue?

The first alternative is a higher tax on realised capital gains above $3 million. This is the simplest alternative approach. This allows investors to still plan for the long-term without tax impacting asset allocation decisions.

A second alternative is to tax withdrawals on higher balances. If your mandatory withdrawals are above a certain threshold ($150,000 a year, for example), an extra tax is applied.

A third alternative would be hard to imagine as politically feasible - an inheritance tax. Taxing balances over a certain threshold when the owner dies. This would mean no change to the asset allocation or retirement strategy.

What can investors do?

I recently wrote about the lessons we can learn from Salim Ramji, the CEO of Vanguard. One lesson that resonated with me was that while investors hate uncertainty, as soon as they know what is happening they quickly move on and adjust to new conditions.

There’s very little that we can individually do to change tax proposals. What we can do is put ourselves in the best position to create and build wealth despite the changing regulatory and legislative environment.

With a review of the policy already scheduled in for 2027, there’s a more likely chance for changes than with other tax policies.

In the meantime, there are a few approaches investors can consider:

  • Work with a tax professional to utilise losses where possible to offset gains
  • Plan for liquidity needs now, especially if you hold illiquid assets. This may mean shifting asset allocation.
  • Consider holding new contributions in cash to avoid unnecessary taxes or transaction costs.
  • Use spousal contributions strategically to spread balances and reduce exposure above the cap.

Final thoughts

There are two sides to every argument and the new tax proposal is no different. For both sides, we must come back to the purpose of superannuation – it is for saving and investing for your retirement.

This is encouraged by tax concessions. It is not a tax haven, with the side benefit of saving for your retirement. The government believes that $3 million threshold is an adequate threshold for retirement savings. That is until it isn’t which will occur without indexation.

The opposing argument is that retirement is a long-term endeavour. Forcing investors to reduce their risk capacity and hold liquid assets anticipating a tax bill does not serve the purposes of superannuation. Nor does it pass the fairness test with potential double taxation.

Importantly, this policy reduces confidence in the superannuation system. This is a change in the goalposts that reduces trust in investing over the long-term in the vehicle. The tax will slowly start to suck in more and more Australians as they become victim to the lack of indexation and more people will question the wisdom of locking up money in super.

Part of being a long-term investor is adjusting to changing conditions which are inevitable over decades long time horizons. Regardless of the fairness of the policy, await the policy outcome and plan to optimise your position accordingly.

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Detailed example of application of the tax:

Jess has a TSB of $4 million on 30 June 2025, and $4.5 million on 30 June 2026.

Jess receives concessional contributions to superannuation of $27,500 in the 2025-26 income year, including $9,500 in salary sacrifice contributions.

For Division 296 tax purposes, her total contributions for the year are $23,375 after correcting for the 15 per cent tax paid by her superannuation fund on these concessional contributions as under subsection 296-55(2) (85 per cent x $27,500).

Jess’s adjusted TSB at the end of the year is calculated to be $4,476,625 by deducting her total contributions of $23,375 from her end of year TSB of $4.5 million as under section 296-45.

Jess’s basic superannuation earnings for Division 296 tax in the 2025-26 income year are calculated as $476,625 by subtracting her previous TSB from her adjusted current TSB under subsection 296‑40(2) ($4,476,625 - $4 million).

As Jess does not have unapplied transferrable negative superannuation earnings under paragraph 296-110(1)(b), under paragraph 296-40(1)(a) her superannuation earnings for the 2025‑26 income year will be her $476,625 in basic superannuation earnings.

As her TSB at the end of the year is greater than the large superannuation balance threshold of $3 million and her superannuation earnings for 2025‑26 are greater than nil, Jess will have taxable superannuation earnings for Division 296 tax purposes under subsection 296-35(1).

The percentage of Jess’s superannuation earnings above the $3 million threshold is calculated as 33.33 per cent, by calculating the percentage of her TSB at the end of the year over $3 million rounded to 2 decimal places under subsections 296‑35(2) and (3) (($4.5 million - $3 million)/$4.5 million).

Jess’s taxable superannuation earnings for Division 296 tax are calculated as $158,859.11 by multiplying her superannuation earnings by the percentage of the earnings above the threshold under subsection 296-35(1) (33.33 per cent x $476,625).

This taxable superannuation earnings amount will be taxable at 15 per cent. Jess will have a Division 296 tax liability of $23,828.85 for the 2025-26 income year (15 per cent x $158,859.11).