Potential New Unrealised Capital Gains Tax for Super Balances over $3M
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The Australian government has introduced significant changes to the taxation of superannuation funds with balances exceeding $3 million. These reforms, set to take effect from July 1, 2025 should they be passed through both houses by the new government, aim to increase the concessional tax rate on super account earnings in the accumulation phase from 15% to 30% for balances above the threshold. While the stated motive of this change is to improve tax equity, it in essence if passed as tabled, will operate as an unrealised capital gains tax.
It is important to note as mentioned above that the passing of the law as currently tabled will be based on the final senate numbers, however given the recent election result, there is some more probability the law will pass. As such, we summarise the effects for you to consider below if impacted.
What Are Unrealised Capital Gains?
Unrealised capital gains refer to the increase in the value of assets—such as shares or property—that have not yet been sold. Traditionally, capital gains tax is only applied when an asset is sold, meaning the gain is "realised." However, under the new policy, super funds will be taxed on unrealised gains, even if the assets remain unsold.
Key Features and Impacts of the Tax Changes
- Higher Tax Rate: Super funds with balances over $3 million will see their tax rate on earnings increase from 15% to 30%.
- Tax on Unrealised Gains: The policy will apply to increases in asset values, even if they are not sold by the balance date, usually June 30 of any given tax year.
- Impact on Self-Managed Super Funds (SMSFs): SMSFs, which often hold illiquid assets like property, may struggle to generate the cash flow needed to pay the tax, potentially forcing premature asset sales.
- Loss Carry-Forward: Super account holders will be able to carry forward losses as an offset against future tax liabilities. There is limited detail on how previous unrealised capital losses would impact realised gains.
- Distorted asset strategies: Unrealised gains could distort investment strategies, encouraging fund holders to shift assets outside of superannuation to avoid the tax.
- Asset price inflation and indexation: Additionally, if the $3 million threshold is not indexed, as the legislation is currently tabled, more Australians could be affected over time as asset values rise due to asset price inflation.
Potential Impacts on Investors
For individuals with large super balances, these changes may prompt a reassessment of investment strategies. Some may consider reducing their super balances below the threshold or shifting investments into other tax-efficient vehicles, such as principal residences, which currently remain exempt from capital gains tax.
If the bill passes as drafted and the start date is 1 July 2025, the first impact date for these changes will be 30 June 2026. In effect, clients have a 12-month window in order to re-organise their super if they decide to invest outside of super.
This is a significant change in the policy landscape that will require significant decision making for those potentially impacted. Please contact Simaco Partners if you have any questions and should the legislation pass.
