The Overlooked Super Tax Revealed After the Election

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The return of the Albanese government has raised concerns regarding the anticipated changes in the taxation of investment returns.

After Labor’s decisive win on Saturday night, which likely strengthens their position in the Senate, it appears that the proposed changes are on a path to becoming law soon.

Retirement income in Australia

Australia’s retirement income system comprises two pillars: a government-funded age pension as well as private superannuation.

Super includes compulsory employer-funded contributions as well as additional personal contributions.

These two elements work together; an individual can receive a pension even if they have private superannuation. However, the more they have in super, the less they qualify for in pension benefits.

About 70 per cent of superannuation assets are held in Australian Prudential Regulation Authority (APRA)-regulated funds, and 25 per cent are held in self-managed super funds (SMSFs).

There are two kinds of taxes—and tax concessions—associated with superannuation. First, employer contributions and certain capped personal contributions are subject to a 15 percent concessional tax rate. Secondly, income generated by a super fund is taxed at 15 percent while in the accumulation phase when contributions are being made. Once in the pension phase, income is not taxed.

So what does the proposed reform entail?

Starting 1 July, the government proposes to increase the concessional tax rate on super account earnings in the accumulation phase from 15 per cent to 30 per cent for balances above $3 million.

Those affected — about 80,000 super account holders, or 0.5 per cent of the total — will continue to benefit from the existing 15 per cent concessional tax rate on earnings on the first $3 million of their super balance.

They will also be able to carry forward any loss as an offset against their tax liability in future years.

Concerns with the proposed reform

Concerns have been raised this reform implies the taxation of unrealised capital gains on assets held in super accounts, such as shares or property, even if they have not been sold.

This is, indeed, a significant departure from the status quo. Both APRA-regulated funds and SMSFs are currently only required to pay capital gains tax once the asset is sold and the gain is crystallised.

The move to tax unrealised capital gains is likely to prove particularly onerous for SMSFs. The typical industry super fund has a diversified portfolio of assets of varying liquidity, including significant cash holdings. But SMSF portfolios are often dominated by a large and illiquid asset (one that cannot be easily sold and converted into cash) such as a farm or business property.

As a result, an SMSF facing a large unrealised capital gain, say from an increase in property values, may not have sufficient cash flow to pay the associated tax bill. The SMSF trustee might be forced to prematurely sell assets to meet the fund’s tax liability.

In the United States, former president Joe Biden’s 2025 budget included a similar proposal to tax unrealised capital gains for households with more than US$100 million ($155.9 million) in wealth.

Purpose of the proposed reform

In announcing this initiative, Treasurer Jim Chalmers suggested the motivation was two-fold.

First, the federal government is facing pressure on the budget bottom line and generous tax concessions for super are becoming expensive.

Second, current super tax concessions are highly regressive. This means most benefits of the concessions flow to the wealthiest households which, in any case, will not be eligible for the pension.

The cost of current super concessions to the federal budget is about $50 billion in foregone revenue, according to the Treasury. That is almost the cost of the age pension.

The Grattan Institute argues superannuation has become a “taxpayer-funded inheritance scheme”. A Treasury review found most Australians die with large outstanding super balances.

The Association of Superannuation Funds of Australia Retirement Standard calculates that, for a comfortable retirement, a couple needs a super balance of about $700,000 if they retire at age 67. The $3 million threshold is out of the ballpark. However, if the threshold is not indexed, more people will be affected over time.

So, is this reform useful?

According to the government’s Retirement Income Review, the objective of Australia’s super system should be to “deliver adequate standards of living in retirement in an equitable, sustainable and cohesive way”.

While the proposed tax change aims to improve the equity and sustainability of Australia’s super system, it is not clear how it will work in practice.

In response to SMSF concerns about the difficulty in paying tax bills, the government’s proposal gives taxpayers 84 days to pay the tax liability instead of the usual 21 days. This hardly mitigates the risk that SMSF trustees may have to liquidate the main asset in their fund.

The Biden proposal had presented an alternative model, allowing for the tax liability to be paid over several years, not all at once. Alternatively, taxpayers could pay an interest-like charge while deferring their unrealised capital gains tax liability.

Such alternatives do not appear to have been seriously considered in the Australian government’s proposal.

Ultimately, though, the question must be asked: is taxing volatile unrealised capital gains really the most effective way to improve equity in, and the sustainability of, the superannuation system?

Mark Melatos is an associate professor of economics at the University of Sydney.

He does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.

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