How to avoid paying capital gains tax on your super balance  

There’s been a lot of uproar about the government’s proposal to tax unrealised capital gains on super balances above $3 million. The concern is that this sets a dangerous precedent – what’s to stop them taxing unrealised capital gains in other environments.  

But here’s the irony: most superannuation members already pay tax on unrealised gains every day. That’s simply how pooled super funds operate. The only way to avoid it is to switch to a wrap platform or an SMSF. But is that worth doing?   

How do pooled super products work  

Most super funds operate as pooled investment products. This means your money is combined with other members’, and you own units in the fund, not the underlying investments, similar to how an ETF works. 

Each day, the fund recalculates its unit price based on the value of the underlying assets. Importantly, this calculation includes a provision for tax on any unrealised capital gains. The reason is to ensure fairness: if someone exits the fund, they have effectively contributed their share toward the future tax liability, so those who remain are not left carrying more than their share of the liability.  

In short, even if none of your investments have been sold, a portion of your balance is reduced each day to account for unrealised capital gains tax. 

How to avoid paying any CGT over your working life  

If you want to avoid paying tax on unrealised capital gains in super, you need to directly own the underlying investments. You can do this via a wrap platform (I prepared a detailed review of these here) or by establishing a self-managed super fund (SMSF). 

Here’s why that matters: once your super is converted into a pension account, and if your balance is under the Transfer Balance Cap (currently $2 million), any unrealised capital gains essentially vanish. That means you never pay tax on the capital growth your investments accumulated throughout your whole working life. 

However, if you are using a wrap product and decide to switch to a different provider, that will typically trigger capital gains tax. This is because the legal holder of the assets, the trustee, changes. To avoid CGT, you must stick with the same wrap provider for your entire working life. While it’s possible to open a second wrap account with a different provider, running two accounts is often not cost-effective. 

An SMSF gives you more flexibility. You can change investment platforms or switch to no-cost brokerage options like Betashares Direct without triggering CGT, because the trustee remains the same.  

But keep in mind: wrap platforms provide valuable performance tracking and reporting tools. Without that visibility, it’s hard to benchmark returns and to give you confidence that you are better off under those arrangements. So, returns reporting is critical.  

Factors that influence how much tax you could potentially save  

In terms of ascertaining how much avoiding tax on unrealised gains could save you there are several considerations 

Timing of super contributions  

Investment returns compound over time, which means the sooner your super balance grows through contributions, the greater the potential capital gains tax saving.  

For many of our clients, it takes until their early to mid-40s to reach around $250,000 in super. By their early 50s, that typically doubles to $500,000, and then doubles again to $1 million by age 60. In other words, most of the dollar value of compounding happens in the last 10 to 15 years before retirement. 

So, if your super balance is already relatively high for your age, you stand to benefit more from the CGT saving. On the other hand, if your balance is lower and even if you are planning to top it up heavily in the final decade of your retirement, your unrealised capital gains, and therefore potential tax saving, will likely be below average. 

Time until retirement 

The number of years until retirement have can make a big difference on the CGT savings. Of course, if you are only 5 years away from retirement, the CGT savings as likely to be minimal.  

Portfolio turnover  

How your super is invested also affects how much tax you may pay. For instance, many actively managed funds have high portfolio turnover, exceeding 100% per year. That means most of the returns are realised and taxable each year, so avoiding unrealised gains becomes largely irrelevant. 

In contrast, index funds tend to have very low turnover, often less than 1%, which means they buy and sell very little each year. This keeps realised capital gains tax to a minimum. For example, over the 5 years to May 2025, the Vanguard International Shares Index Fund delivered a total return of 15% p.a., made up of 5.4% p.a. in income and 9.6% p.a. in unrealised capital growth. 

Change in circumstance  

Changes in your financial circumstances can often require changes to your super structure or investments. You might need to switch super funds at some point during your career, such as to access employer provided benefits You could go through a divorce and split your super with an ex-partner. Or you might stop contributing altogether while working overseas. 

If there’s one thing you can count on in life, it’s change, often unexpected. And your super strategy needs to be flexible enough to adapt. 

Quantifying potential savings 

I reviewed a random sample of 30 client accounts, each established between 4 and 15 years ago (average life was 8 years). This selection was diverse, covering various client circumstances, balances, and contribution histories. 

Based on wrap investment performance reports, the average return was composed of 60% unrealised growth and 40% income and/or realised gains. The highest percentage of unrealised gains observed was 70%, while the lowest was 40%. 

If a pooled super fund has a pre-tax return of 7%, tax will reduce this return. Assuming 60% of the return comes from unrealised capital gains and 40% from income, the tax impact will reduce the return by 0.84%, resulting in an after-tax return of 6.16%. In contrast, a non-pooled product would only be taxed on the income portion, so the after-tax return would be 6.58%, which is 0.42% higher. 

Fee comparison 

The table below compares the total costs for pooled super products such as Vanguard Super High Growth and AustralianSuper High Growth versus un-pooled products such as a wrap product, SMSF, and AustralianSuper Member Direct.

The AustralianSuper Member Direct option is essentially a basic wrap product. It enables members to invest in a limited range of ETFs while enjoying the tax advantages typical of wrap accounts. However, its ETF menu is somewhat restricted and lacks several indexing strategies we commonly utilise, such as Dimensional and fundamental indexing, amongst others. The most effective approach with this option is to allocate your entire balance to a single ETF: the Vanguard Diversified High Growth Index ETF (VDHG), which is identical to the High Growth option at Vanguard Super. Therefore, it’s the same as Vanguard Super but allows you to avoid CGT at a slightly lower cost.

Most wrap providers offer family discounts. Therefore, to compare fees using the table above, combine your and your spouse’s balances.

The numbers: Higher fees versus potential tax saving  

Is it worth paying higher fees for a wrap platform get access to a boarder investment menu and avoid tax on unrealised gains? To test this, I modelled four scenarios, assuming the same pre-tax, pre-fee investment return of 7% per annum in each case. This analysis isolates the impact of tax and fees only.

20-year-old starting their carer

The first was a 20-year-old just starting their career with $15,000 in super, contributing consistently until age 60. I project super balances at age 60 in today’s dollars to be:

• AustralianSuper Member Direct: $1,109,000 (the implied after fees and tax average return is 5.43% p.a.).
• Wrap: $1,068,000, $41,000 less (the implied after fees and tax average return is 5.21% p.a.).
• Vanguard Super: $1,020,000, $89,000 less (the implied after fees and tax average return is 4.94% p.a.).
• AustralianSuper High Growth: $989,000, $120,000 less (the implied after fees and tax average return is 4.75% p.a.).

35-year-old with a healthy super balance

The second scenario was a 35-year-old with a $250,000 balance who maximises concessional contributions to age 60.

• AustralianSuper Member Direct: $1,736,000 (the implied after fees and tax average return is 5.80% p.a.).
• Wrap: $1,692,000, $44,000 less (the implied after fees and tax average return is 5.65% p.a.).
• Vanguard Super: $1,603,000, $133,000 less (the implied after fees and tax average return is 5.32% p.a.).
• AustralianSuper High Growth: $,1,551,000, $185,000 less (the implied after fees and tax average return is 5.12% p.a.).

50-year-old, 10 years away from retirement

Finally, the third scenario was a 50-year-old with a $500,000 balance also maximising contributions through to age 60.

• AustralianSuper High Growth: $1,028,000, $59,000 less (the implied after fees and tax average return is 6.12% p.a.).
• AustralianSuper Member Direct: $1,087,000 (the implied after fees and tax average return is 5.93% p.a.).
• Wrap: $1,071,000, $16,000 less (the implied after fees and tax average return is 5.61% p.a.).
• Vanguard Super: $1,044,000, $43,000 less (the implied after fees and tax average return is 5.41% p.a.).

The percentage average returns are lower for scenario one because the tax liability on contributions and income are a greater proportion of the members balance compared to the other two scenarios.

The difference between a wrap and AustralianSuper’s Member Direct ranges between 0.15% and 0.22% p.a. If used correctly, the broader investment menu that a wrap provides could help you structure a portfolio that achieves a higher long-term return, more than offsetting these slightly higher wrap fees.

A broad investment menu is important

As I explain in more detail in this blog, there are several other benefits to using a wrap platform. One key advantage is the broader investment menu, which allows you to implement more sophisticated, rules-based, low-cost, and transparent indexing strategies. This gives you the flexibility to better manage risks and take advantage of opportunities, which, in theory, should lead to better returns. 

For instance, earlier this year I suggested reducing exposure to the big banks and miners in Australia and using EX20 as one example of how to do that. Over the 2025 financial year, EX20 returned 16.05% compared to the broader market index at 13.70%. EX20 does not appear on AustralianSuper Member Direct investment menu.

Vanguard Super and VDHG only use one indexing strategy; traditional market cap indexing.  

That said, managing a superannuation portfolio using a wrap product requires either the confidence, knowledge, and experience to do it yourself, or the guidance of a financial advisor. 

The conclusion is…  

If you are already working with a financial advisor on other matters, then paying the higher fees for a wrap platform is justifiable if you expect the gross future returns (i.e., before fees and tax) will be the same or better as pooled funds.  

If you’re not working with a financial advisor, a low-cost, un-pooled option like AustralianSuper Member Direct** (as outlined above) might be a better fit. Please note, this blog focuses solely on fees and tax outcomes. It doesn’t address investment returns, which are an important consideration, of course. Next week, I’ll be comparing investment performance in my 2025 super review, so make sure to read that blog alongside this one for a complete picture.

** A reader has kindly highlighted up some important points regarding AustralianSuper’s Member Direct:
(1) When transitioning from accumulation to pension phases, you must move your entire Member Direct balance. If your balance exceeds the Transfer Balance Cap, you’ll need to sell some holdings, potentially triggering Capital Gains Tax (CGT).
(2) You cannot allocate your entire balance to Member Direct; at least 20% must be invested in a pre-mixed option like High Growth.
(3) Member Direct accounts do not support Transition to Retirement (TTR) functionality.