Now Labor has returned to Government, one of its most controversial tax policies is back on the table: A new tax on unrealised superannuation gains over $3m.
The plan, which passed the House of Representatives before the election, has outraged business advocates. With Labor back in power, they’re worried that it could pass the Senate and become law.
But what is being proposed, exactly – and how could it impact you?
What does it all mean?
Labor’s proposed tax change is called Division 296.
As mentioned above, the change would apply an extra tax to superannuation funds over $3 million.
These balances are already taxed at 15 per cent, but this law would add another 15 per cent on top. And that’s not all: The extra 15 per cent tax would also apply to unrealised gains, a fact that has many concerned.
Unrealised gains are profits you make on paper – the increase in value of an asset you own, but haven’t sold yet. For instance, if your property or shares go up in value, that’s an unrealised gain until you actually sell them and lock in the profit.
To boil it down, Division 296 would tax profits that superannuation holders haven’t actually received yet.
Why should business owners be paying attention?
Business owners could be impacted by this proposed tax if they:
- Have over $3 million in super (or are close to this amount)
- Are seeking investment (though in a less direct way).
The tax targets high-net worth individuals – it’s a form of “taxing the rich”, as wealth coach Andrew Woodward put it.
“There’s not a huge number of population who have 3 million or above, so it’s considered almost an elitist thing,” Woodward told ISB.
Accordingly, the tax will have the most direct impact on the “top end of town” – the c. 80,000 people across Australia with $3 million or more in super.
The tax would also impact about 13,000 small-business owners who have self-managed super funds (SMSFs) and use these funds to hold their business premises, according to Peter Burgess, CEO of the SMSF Association.
“We see lots of different types of small-business premises being held by self managed super funds,” Burgess told ISB. “It’s a common strategy.”
What’s the problem?
Taxing unrealised gains introduces a lot of uncertainty for those affected.
If you own shares – particularly in less stable entities – you’ll know that the value of these can rise and fall dramatically within a short period of time. If these fluctuating shares were taxed, you would owe the ATO wildly different amounts depending on how valuable they were at tax time.
The same would apply for shares you’ve invested in through your superannuation.
If unrealised super gains were taxed, it would make cashflow management almost impossible, said Burgess.
“You won’t know from one year to the next what your liability will be, because the gains are unrealised and rely on the value of shares that year,” he said.
Woodward pointed out that it’s a major disincentive to grow your super balance.
“It’s going to create a short-term mentality,” he said. “If you keep getting taxed every year on money that you haven’t actually realised, and you’ve got to fund that from somewhere – that needs people having to sell investments to pay their tax bill, which doesn’t make any sense.”
How this could impact start-up investment
SMSFs are a major source of funding for start-ups; some SMSF holders prefer to invest in start-ups as a high-growth (but high-risk) investment option.
If this tax is introduced in its current form, it could see superannuation holders hesitant to put more value into their super, stifling investment for some start-ups.
“Now there’ll be a disincentive for people to invest in startups,” said Woodward. “If that investment suddenly goes up in value and they get taxed on it, and then that company doesn’t do so, there’s no ability to recoup what you’re paying in tax.”
Burgess says he’s spoken to a number of start-up companies who are concerned about the potential change.
“We’ve had many discussions with venture capitalists and then the startup companies who are very concerned about this, because, you know, they’re in a world where they can have a very big increase in the value of their shares, for example, in one year, but it can drop significantly the next year, and you don’t get this tax back,” he said.
How likely is it for this to become law?
As mentioned above, the measure has already been passed by the House of Reps. Now that Labor is back in Government, it could have a fair chance of passing through the senate, too – especially now Labor needs the support of fewer crossbenchers.
“The government has been trying to pass 296 for two or three years now,” Mark Chapman of H&R Block told ISB. “With Labor back in power, there’s a very good chance that it’d be reintroduced to the senate – and a decent chance it could be passed.”
Burgess expressed a similar sentiment.
“In the lead up to the election, [Labor] made it very clear that this tax is still their policy,” he said. “I think the Treasurer referred to it as ‘unfinished business’.”
Some high-net worth individuals and business owners are already taking action: Woodward said he was already seeing people removing money from their super.
But the tax isn’t yet a foregone conclusion. Burgess is hopeful that the government will take a step back and reconsider the design of the tax, given that many influential business leaders have voiced their disapproval of Division 296.
“We would really like the government to consult with the industry broadly on this, and to sit down with us and talk through the different ways in which they can achieve what they’re trying to achieve,” he said.
While the proposed start date for the tax was July 1 2025, Burgess thinks it is likely this will be deferred to give superannuation holders and the ATO more time to prepare. That’s if the tax passes before then – or at all.
In addition, the first test date for the tax (when the unrealised gains are calculated) isn’t supposed to be until June 2026. In theory, this gives affected parties some time to prepare for changes.
