New taxes on super didn’t get much attention in the election campaign. But they could be tricky to implement

The re-election of the Albanese government has led to renewed concern^[1] about planned changes to the taxation of investment returns in superannuation funds.

Labor’s emphatic victory on Saturday night, including what looks like an increased presence in the Senate, suggests the legislation^[2] is likely to become law in the near future.

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 pillars are complementary; a person can receive a pension even if they have private super. But the more super they have, the less pension they are eligible for.

About 70% of superannuation assets are held in Australian Prudential Regulation Authority (APRA)-regulated^[3] funds and 25% are held in self-managed super funds (SMSFs).

There are two types of tax – and tax concessions – on super^[4]. First, employer contributions and capped personal contributions are taxed at a concessional rate of 15%. Second, income earned by a super fund is taxed at 15% for balances in the accumulation phase^[5] (when contributions are being made). Income earned in the pension phase is tax-free.

So what does the proposed reform entail?

Starting July 1, the government proposes^[6] to increase the concessional tax rate on super account earnings in the accumulation phase from 15% to 30% for balances above A$3 million.

Those affected – about 80,000 super account holders, or 0.5% of the total – will continue to benefit from the existing 15% 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^[8] this reform implies the taxation of unrealised capital gains^[9] 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^[10] 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 (ones 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, President Joe Biden’s 2025 budget included a similar proposal^[11] to tax unrealised capital gains for households with more than US$100 million in wealth.

Purpose of the proposed reform

In announcing this initiative^[12], 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^[13] 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 Treasury^[14]. That is almost the cost of the age pension.

The Grattan Institute^[15] argues superannuation has become a “taxpayer-funded inheritance scheme”. A Treasury review found most Australians die with large outstanding super balances^[16].

The Association of Superannuation Funds of Australia Retirement Standard^[17] 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^[18] will be affected over time.

So, is this reform useful?

According to the government’s Retirement Income Review^[19], 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^[20], 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?

References

1. ^{^} renewed concern (www.smsfadviser.com)
2. ^{^} the legislation (www.aph.gov.au)
3. ^{^} (APRA)-regulated (www.apra.gov.au)
4. ^{^} There are two types of tax – and tax concessions – on super (treasury.gov.au)
5. ^{^} accumulation phase (www.superguide.com.au)
6. ^{^} the government proposes (treasury.gov.au)
7. ^{^} Fizkes/Shutterstock (www.shutterstock.com)
8. ^{^} have been raised (www.abc.net.au)
9. ^{^} unrealised capital gains (www.afr.com)
10. ^{^} capital gains tax (www.australiansuper.com)
11. ^{^} similar proposal (www.cbpp.org)
12. ^{^} announcing this initiative (ministers.treasury.gov.au)
13. ^{^} wealthiest households (theconversation.com)
14. ^{^} according to Treasury (treasury.gov.au)
15. ^{^} Grattan Institute (grattan.edu.au)
16. ^{^} large outstanding super balances (www.morningstar.com.au)
17. ^{^} Retirement Standard (www.superannuation.asn.au)
18. ^{^} more people (www.afr.com)
19. ^{^} Retirement Income Review (treasury.gov.au)
20. ^{^} over several years (www.cbpp.org)