In a major policy revision, the Australian government has abandoned its controversial proposal to tax unrealised capital gains on superannuation balances exceeding a set threshold. This element was a key, and highly contentious, part of the proposed Division 296 tax changes aimed at winding back tax concessions for high-balance superannuation accounts.
Treasurer Jim Chalmers announced the revised plan, which he stated was a response to significant feedback from industry and self-managed super fund (SMSF) operators who had warned that taxing ‘paper profits’ could create liquidity issues for members, particularly those holding illiquid assets like farms or investment properties within their super funds.
The revised policy will instead apply the higher concessional tax rate only to realised earnings (i.e., actual investment income and capital gains from sold assets) on large super balances.
The Revised Superannuation Tax Plan
The new proposal retains the core objective of increasing tax on high superannuation balances but introduces significant modifications:
1. Removal of Unrealised Gains Tax
The most critical change is the scrapping of the tax on unrealised capital gains. Under the original proposal, the tax would have applied to the change in the value of an asset even if it hadn’t been sold, potentially forcing holders of illiquid assets to sell to meet the tax liability. The revised methodology will apply the new concessional tax rates only to realised earnings, based on taxable income.
2. New Tiered Tax Rate Structure
The government is proceeding with a new, higher concessional tax rate for large balances, but is introducing a two-tiered structure:
- 30% Tax Rate: Applied to earnings on superannuation balances between $3 million and $10 million on a proportionate basis. This doubles the current 15% concessional tax rate.
- 40% Tax Rate: A new, higher rate applied to earnings on superannuation balances exceeding $10 million.
3. Indexation of Thresholds
Both the $3 million and $10 million thresholds will be indexed to inflation (in line with the Consumer Price Index), addressing a major criticism of the original plan that a fixed threshold would gradually capture a growing number of middle-income Australians over time due to ‘bracket creep.’
4. Delayed Start Date
The implementation of the new measures has been delayed by one year and is now scheduled to commence on July 1, 2026. This delay is intended to allow for comprehensive industry consultation and for super funds to develop the necessary systems for implementation.
5. Boost for Low-Income Earners
Alongside the changes for high-balance accounts, the government announced an increase to the Low-Income Superannuation Tax Offset (LISTO), raising the maximum offset from $500 to $810 and lifting the eligibility threshold from $37,000 to $45,000. This measure is intended to benefit low-income Australians, predominantly women and part-time workers.
The Importance of SMSF Tax Planning
For the 80,000 Australians expected to be impacted, particularly SMSF trustees, proactive tax planning and consulting are now essential. It is a common misconception that the entire earnings of a super fund will be taxed at 30% or 40% once the balance exceeds the $3 million or $10 million threshold respectively.
The Division 296 tax is only applied to the proportion of a member’s earnings that is attributable to the balance above the threshold. This proportion is determined by a complex formula comparing the amount over the threshold to the member’s Total Superannuation Balance (TSB) at the end of the financial year.
For example, a member with a $4 million balance only has 25% of their balance above the $3 million threshold. Consequently, only 25% of their fund’s earnings will be subjected to the additional 15% tax. Careful planning, including spousal equalisation strategies and the strategic timing of asset sales to manage realised capital gains, will be crucial to legally navigating the new rules and optimising retirement savings under this new regime.
Political and Sectoral Fallout
Despite the government’s concessions, the revised policy faces continued scrutiny, particularly from sectors whose investment strategies rely heavily on superannuation flexibility. For Small and Medium Business (SMB) owners who hold illiquid assets like business premises or farms within their self-managed super funds (SMSFs), the new tax on realised earnings above the $3 million threshold still presents potential cash flow and succession planning challenges. Moreover, the start-up and innovation sector has voiced concerns that any increased taxation or complexity around large SMSFs could stifle a significant source of early-stage funding, as these high-net-worth funds are often crucial investors in unlisted, innovative ventures. The debate therefore shifts from the mechanism of taxing paper profits to the long-term implications for private capital formation and entrepreneurial investment within Australia.
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