Proposed Tax on Unrealised Superannuation Gains Sparks Debate Over Fairness and Economic Impact

Key Highlights

• Government plans to tax unrealised gains on superannuation balances over $3 million starting July 2025.
• Critics warn of potential cash flow crises for superannuants and adverse effects on Australia’s trillion-dollar SMSF industry.
• Financial experts urge indexing the cap to inflation and taxing realised gains instead of unrealised ones.

The Australian government’s proposed superannuation tax on unrealised gains has ignited widespread criticism, with opponents labeling it as unfair and economically disruptive. The legislation, set to commence in July 2025, would impose taxes on the theoretical growth of super balances over $3 million, even if the gains are not realised.

This controversial policy would tax paper gains that might never materialize, creating potential financial hardships for Australians, especially those managing self-managed super funds (SMSFs).

Understanding the Proposed Changes

Under the new rules, if the value of your super assets rises above the $3 million cap in a given year, you would be taxed on those gains. However, if the asset value later drops, the tax liability from the initial increase would remain, with no provision to reclaim previously paid taxes.

Critics point to historical examples, such as the Global Financial Crisis (GFC), to illustrate the risks. For instance, the ASX All Ordinaries Accumulation Index surged by 30.3% in 2007 but fell by over 50% during the GFC. Had the proposed tax been in effect then, Australians would have faced significant tax liabilities for gains that were subsequently wiped out.

Impact on SMSFs and Broader Economic Concerns

The proposed tax has raised alarms within the $1 trillion SMSF industry, which comprises a significant portion of Australia’s retirement savings. Louise Kennerley, an industry expert, argues that this policy could prompt SMSFs to move down the risk curve, favoring low-return investments like cash deposits over higher-risk assets such as equities.

Additionally, superannuation members might be forced to prematurely liquidate investments to meet tax obligations. This is particularly concerning for farmers and property owners, whose assets are often tied to their livelihoods. Selling such assets to pay tax on unrealised gains could lead to significant financial and emotional strain.

A Growing Pool of Affected Australians

While the government estimates the tax will initially impact around 80,000 super balances, this number is expected to grow rapidly due to the unindexed $3 million threshold.

The Financial Services Council predicts that approximately 500,000 super balances will eventually breach this cap, including over 200,000 Australians under 30, as inflation erodes the value of the threshold. This lack of indexing could accelerate the reach of the policy, disproportionately affecting Australians over time and undermining the stability of the superannuation system.

A Call for Sensible Alternatives

Critics argue that the proposed tax is out of step with Australia's broader tax system, which typically taxes realised earnings rather than unrealised gains. In October 2023, financial experts and industry bodies submitted recommendations to the government, including:

• Indexing the $3 million cap to inflation.
• Taxing only realised earnings over $3 million.
• Simplifying calculations for individuals with single superannuation funds.

These adjustments would maintain the policy’s intent while avoiding unnecessary financial strain on Australians and preserving the integrity of the superannuation system.

A Decades-Old System at Risk

Australia’s superannuation system, introduced in 1992 under former Prime Minister Paul Keating, has long been hailed as a world-class model. By encouraging savings and providing access to large pools of domestic capital, the system has benefited individual Australians, corporate Australia, and the broader economy.

However, the proposed tax threatens to undermine this system, potentially reducing Australians’ confidence in superannuation as a retirement savings vehicle. Critics warn that the policy could discourage investment in higher-growth assets, jeopardizing access to critical risk capital for Australian businesses.

Support for Alternative Reforms

While acknowledging the need to modernize the system, industry leaders support a tax increase on realised earnings for large super balances. Increasing the tax rate from 15% to 30% on realised gains for balances over $3 million would achieve the government’s revenue goals without the unintended consequences of taxing unrealised gains.

What’s Next?

The proposed legislation has passed the House of Representatives and now moves to the Senate, where the government will need support from crossbenchers to enact it into law. Stakeholders are urging senators to carefully consider the broader economic implications and the fairness of taxing gains that may never materialize.

The proposed tax on unrealised superannuation gains has sparked a contentious debate about fairness and economic impact. With concerns over potential cash flow issues, reduced investment confidence, and broader economic repercussions, critics are calling for a re-evaluation of the policy.

A more balanced approach—focusing on taxing realised earnings and indexing the cap to inflation—could protect the integrity of Australia’s superannuation system while addressing the government’s revenue needs. As the legislation heads to the Senate, its outcome will have lasting implications for the nation’s retirees, businesses, and economy.