After the resounding win at the federal election in May 2025, Prime Minister Anthony Albanese and Treasurer Jim Chalmers have been determined to pass changes to the taxation of large super funds in Australia, known as the “$3 million super cap” or more technically Division 296.
Whilst we have been monitoring the developments this year and thinking ahead, ultimately, we have been advising our clients to sit and wait until the final legislation has passed before making any drastic changes to their plans. We held the belief that it didn’t make sense to act before the legislation had been passed, and that there was a real possibility of changes to the final legislation given the level of backlash it had received. For most of the year, it appeared as though the original proposed changes were destined to go ahead, until, on the 13th October, Jim Chalmers announced a major winding back of the proposed changes and outlined the new proposed changes to the taxation of large super funds.
It is important to note that the new legislation still has not passed the Senate and we are still awaiting the finer details of the legislation. It is entirely possible that there could be further changes to come. However, based off the current information, this is what we know.
Out with the old changes
The previously proposed changes involved:
- An additional 15% tax to apply to “earnings” in super above $3 million.
- The additional 15% tax on earnings was to apply to income, realised capital gains as well as unrealised capital gains.
- No capital gains tax discount was to apply to the unrealised capital gains.
- The $3 million cap was not indexed; it would remain fixed indefinitely.
- The commencement date was 1st July 2025.
These proposed changes were met with major pushback and controversy for two key reasons.
Firstly, the taxing of unrealised gains is an entirely new method of taxation that goes against the foundation of our tax system, and it creates a range of negative implications for the individuals and the broader economy. Many Self-Managed Super Funds (SMSF) own property, which are illiquid assets and obviously cannot be sold down incrementally to meet the demands of the new tax. Many Australians also own farmland and business premises through their super funds. A tax on unrealised capital gains would likely have required many to sell these assets, causing people to lose control of their properties which inadvertently impacted their businesses . Super funds that predominantly own property already face liquidity problems (as we discussed in The Liquidity Trap) in pension phase, and this would only have been amplified with the proposed tax on unrealised gains.
Super funds are also a common vehicle to invest in smaller start-up businesses in Australia, which are typically not publicly listed and illiquid in nature. Industry lobbyists rightly argued that the proposed tax would hinder private investment in this sector, which plays an important role in the innovation and growth of our economy.
Secondly, the $3 million cap was not proposed to be indexed. In the same way that concessional contribution and non-concessional contribution caps have been increasing, this would mean that over time more people would be impacted by the $3 million threshold. The Treasurer pointed out that only ~80,000 wealthy Australians currently have super balances over $3 million, which equates to ~0.50% of super funds. However, analysis from the Financial Services Council (here) indicated that over 500,000 Australians would likely breach the cap in their life, including about 204,000 Australians under the age of 30.
The other concern that was not spoken about as widely in the media was the issue of double taxation. The government had not addressed the issue of tax being paid on both unrealised and realised capital gains. Under what was proposed, super funds would have likely been required to pay tax on the capital growth of investments before they are sold and tax on the capital growth after they are sold. It would have made fair and logical sense that a tax credit from the unrealised capital gains tax would be applied to offset the realised capital gains tax. However, this was never addressed in the proposed legislation.
In with the new changes
- Removal of taxation on unrealised capital gains.
- An additional 15% tax on income and realised capital gains above $3 million, bringing the effective tax rate to 30%.
- The existing 33.33% capital gains tax discount will apply above $3 million, bringing the effective capital gains tax rate to 20%.
- Introduction of an additional 10% tax on earnings above $10 million, bringing the effective rate to 40%.
- The existing 33.33% capital gains tax discount will apply above $10 million, bringing the effective capital gains tax rate to 26.66%.
- Indexation will apply to both the $3 million and $10 million caps in line with the Consumer Price Index (CPI), which is currently 3.2% p.a.
- The commencement date is 1st July 2026.
The new proposed changes have widely been accepted as much more reasonable and acceptable than the prior proposed changes. This is namely due to the removal of tax on unrealised capital gains and the indexation of the caps. The removal of taxation on unrealised capital gains also inadvertently removes the issue of double taxation.
Whilst an increase in taxation is never welcome, these new changes seem reasonable given that the super system was designed to help people save for retirement, not to be a tax haven for wealthy Australian’s. Arguably, if you have more than $3 million in super, the system has done its job, and you can afford to pay more tax.
What impact will this have on large super fund holders?
Prior to the new changes, many large super fund holders would have been considering withdrawing funds from super to move investments into other ownership structures such as personal names, a company or a family trust – or gifting money to children as an early inheritance.
Initially, the government forecast that this new tax would raise $2 billion in tax revenue in its first year. We didn’t expect it to raise close to that amount of tax revenue because most super fund holders impacted would withdraw money from super to avoid the tax. Analysis from the Association of Superannuation Funds of Australia showed that of the people with more than $3 million in super, ~65% are classified as retirees and ~90% are over 60 years of age. As we know, retirees over the age of 60 have met a condition of release to access their super, which means that the majority of the super fund holders affected by the proposed changes will be able to withdraw money from super to stay under the $3 million cap if they want to.
Under the new proposed changes, for balances between $3million and $10 million, we still believe that super still presents a tax friendly environment for most super fund holders. For our clients who fall into this range, they typically already have investment income in their personal names over $45,000, which puts them into a 32% tax rate (with the Medicare levy) at a minimum. The 30% tax rate in super is still more attractive for these individuals.
From a capital gains tax perspective, super fund balances between $3million and $10 million would incur a 20% tax rate. In personal names, this tax rate could range from 16% – 23.5% as you move up the personal tax brackets. In our experience, capital events tend to be large one-off amounts, which tend to result in a ~20% tax rate in personal names, therefore, the effective tax rate for capital gains in super is fairly similar.
We considered the option of moving investments into a trust structure (potentially with a corporate beneficiary) outside of super. Doing so would cap that tax rate at 30% (by distributing into the corporate beneficiary, if no tax-effective individual beneficiaries were available), which would match that of the tax rate on income in super between $3 million and $10 million. In this situation, it is possible that investors might pay higher tax on capital gains, although since companies get a credit for tax paid, in the long run it still might be more tax-effective. In addition, super fund members would also need to pay capital gains tax in super to sell the investments (if their balance exceeds the Transfer Balance Cap) to transfer the excess monies out of super.
In summary, from a taxation perspective, we feel it’s unlikely to be beneficial for investors to move assets out of super to avoid the 30% tax rate applied in super between $3 million and $10 million. For super funds over $10 million, it might be worthwhile taking money out (depending on how much an individual has over $10 million), however, this will only affect a very small portion of the population.
What should people with large illiquid investments in super do?
In short, probably nothing. It is our view that super funds with large illiquid investments such as property are most likely still better off retaining these investments in super if they are under the $10 million cap. This is largely dependent on the individuals’ circumstances, the investment properties and other investment assets that they hold in their personal name. However, it is fair to assume that individuals with over $3 million in super would typically have substantial assets outside super too.
There will be an increased pressure on the liquidity of super funds with the additional tax on income, and this may force some super funds into selling these investments to meet the tax bills and pension payments. However, if substantial liquidity is available, most super fund holders will likely still be better off retaining these investments in super for the foreseeable future.
The other important consideration for those with property inside super is the impact of land tax. SMSFs are assessed as a separate taxpayer for land tax purposes, which means any property owned by the SMSF’s members (in their personal names or trusts) do not impact the SMSF tax liability. Therefore, if an individual has significant property in their personal name, transferring properties from super into their personal name could result in a higher land tax bill. We assessed the impact of the impact for one of our clients in this situation and we estimated it would result in an additional ~$17,000 of land tax annually if the property was moved into his personal name.
In conclusion, the revised proposed super tax rules came as a welcome change to us and our clients. New taxes will always be met with concern, but we believe the updated changes are a more reasonable and equitable approach for super fund holders now and into the future. The proposed changes will likely see far less super fund holders being forced into selling investments and pulling money out of the super environment.
The lesson here for investors is to not make kneejerk decisions and react until changes are law. There have been some stories of clients selling assets, pulling money out of super and giving it to their children to avoid this tax – I wonder if they will regret that decision.
Some people are worried about putting money into super because they are concerned the government will change the rules. They definitely will! However, super is almost certainly always going to be concessionally taxed, so it’s too good to ignore. That said, if you have substantial wealth, you don’t want to put all your eggs into super.
