Six facts you should know about the proposed super tax

The proposed extra 15% tax on super balances over $3 million from 1 July 2025 has sparked much debate. Sold as a move to make the super system “fairer”, the reality is much different and questions about fairness, logic, and long-term impact remain unanswered.

Here are six frightening facts you might not know about the tax – and how it could affect you or someone you know.

1. You will pay tax on assets that have not been sold

Division 296 tax is unrelated to the actual taxable income generated by your fund. Rather, it is a tax on earnings or increases in account balances over $3 million and will be based on the difference in your balance of all your super funds from the start to the end of each year, after adjusting for contributions in and payments out of your fund.

This means any growth in your super balance will include anything that causes your account balance to go up. This will include things such as interest, dividends, rent, and capital growth on assets that have been sold. This includes any notional or ‘unrealised’ gains on assets that increase in value, even if your fund hasn’t sold them. This means that you will have to pay tax on a capital growth for an asset that has not been sold. Capital gains tax will still apply when that asset is sold.

Let’s say your super fund owns a property and your balance grows from $3 million at 30 June 2025 to $4 million at 30 June 2026. Your earnings for the extra tax are therefore $1 million. Not only will your fund pay tax on any rental income it receives from the property, you will also be liable to pay tax on a proportion of earnings above $3 million. In this case, the proportion would be 25%. This means the extra tax you would have to pay on the $1 million of earnings under this new proposal would be $37,500 (($1 million x 25%) x 15% Division 296 tax) even though you have not yet sold the property and made an actual profit!

This issue has caused the most angst as this new Division 296 tax is a fundamental shift from the way the existing Australian tax system works. The current tax regime in Australia only taxes capital gains when assets are realised and sold for more than their cost base.

Another risk is that if Division 296 tax is legislated, it will become a precedent and the government may apply the same approach to assets held by other entities, such as your personal assets, assets held in companies or trust structures, etc.

2. The $3 million threshold is not indexed

The $3 million threshold is not indexed to CPI meaning it will capture more people as prices rise over time. Although the proposal is expected to impact 80,000 people today, it is estimated that around 500,000[1] Australian taxpayers will breach the threshold in their life, where approximately one-third of these super fund members are now under 30.

The long-term impact of not indexing the $3 million threshold means there will be intergenerational inequity between the different generations over time.

3. The new tax is a form of double taxation

The proposal is essentially a double taxation on the same asset. This is unfair. You will pay extra tax every year on the proportion of your balance that exceeds $3 million (assuming your balance continues to grow every year) and then pay tax again on the actual capital gain when the asset is eventually sold.

4. No refund of tax paid if your balance drops to below $3 million

Although the proposal allows individuals to carry forward any negative earnings/losses to offset against future earnings, some individuals may never recoup the tax they have previously paid on unrealised gains if their account balance does not exceed $3 million again.

For example, if we look at what happened over the past few years, many super funds in 2021 experienced large gains followed by a huge year of losses in 2022. Had this proposal been in place during this timeframe, there would be many individuals who would be disadvantaged due to the peak and the fall of the market. That is, such individuals would not receive a refund of tax previously paid when a decrease occurs in a future subsequent year. This means individuals will have to wait for their super balance to recover before they can use the pre-payment of tax they have paid on unrealised gains.

But some individuals may never experience the peak again and won’t see their balance exceed $3 million because of volatile market conditions or because they are in retirement phase and are drawing down their balance to meet their living expenses. In these cases, individuals will have paid tax on capital gains that their fund has never received and worse still, they will not be able to get this money back.

It is only fair that if individuals are going to pay tax on unrealised gains, they should receive a credit or a refund of the tax they have already paid rather than carry forward the loss.

5. Cashflow and liquidity issues for volatile and illiquid assets

While the new tax will apply to both SMSFs and APRA-regulated funds, the inclusion of unrealised capital gains will have a greater impact on SMSFs with exposure to direct property assets. In particular, farmers and small business owners who have legitimately contributed their farms or business properties to their SMSF may struggle to meet this new tax impost if their fund has cashflow issues or if members have little to no wealth outside of super to pay the tax.

As lumpy assets generally cannot be partly sold to pay this new tax, restructuring such assets to generate cashflow may require such properties to be sold which may cause business disruption, impact the member’s livelihood, and lead to substantial transaction costs. Further, forced restructures/disposals may occur when the market is in a downturn and therefore the full, real value of the asset may not be realised.

As such, individuals who are asset-rich but cash-poor will be impacted greatly as they will need to find the cashflow to pay the new tax in any given year even though there has been no actual realisation of the asset.

6. All accounts are included in the $3 million threshold

The proposal also includes certain amounts as part of your super balance which will unfairly impact certain people, such as individuals who receive total and permanent disability (TPD) insurance benefits from a policy held in their super fund. These amounts will increase a person’s balance and may cause them to be taxed on earnings from the TPD proceeds. Individuals in these situations should not be penalised for receiving one-off lump sums that must last them and their family’s needs during their lifetime.

Similarly, individuals who inherit a death benefit pension from their spouse may also be impacted. Say you and your spouse both have balances of less than $3 million each. Receiving your spouse’s super as a pension will cause your balance to increase. This means if a death benefit pension pushes you over the $3 million limit and has earnings in future years, these earnings will also be subject to Division 296 tax. This may cause someone who never expected to be included in this measure to be subject to Division 296 tax.

Where to from here?

The proposed new super tax is meant to start from 1 July 2025, but here’s the catch – what really matters is how much super you have on 30 June 2026, not 2025. So, there’s no need to panic or rush to get your super under $3 million by 30 June 2025.

Why? Because the extra tax only kicks in if your balance is over $3 million at 30 June 2026. Even if your super is well above that now, you won’t pay the new tax if it drops below the $3 million mark by that 2026 deadline.

It’s also important to remember that this tax isn’t law yet. While it’s likely to go ahead, it still must be passed by Parliament. As such, there’s no need to pull money out of super just yet – once it’s out, it can be hard (or impossible) to get it back in.

Many experts believe there are better, fairer ways to tax large super balances without all the complexity that’s currently being proposed.

At the end of the day, Australians need to feel confident in the super system. Major changes like this shouldn’t be introduced without proper warning – we all need clear rules and certainty so we can plan for retirement without constantly shifting goalposts.