Well, all we have to go on is an announcement and fact sheet, but it seems the government has at last recognised the taxing of unrealised gains is madness no matter how you dress it up.
It seems Labor has listened to criticism of the two most egregious features of its original proposal – the taxation of unrealised gains and the lack of indexation of the threshold – and changed both.
If legislated as announced, the new version will also be delayed until 1 July 2026, that is, the first important date will be 30 June 2027. Phew.
We’re not expecting actual legislation until after Christmas and then there will be some consultation. It had better be quick though because even 1 July 2026 isn’t that far away.
What does the new approach look like?
Philosophically some things haven’t changed. The impost is still proposed to be an extra charge over and above existing super taxes. Again, it looks like it will be a personal tax, albeit based on things that are happening in the member’s super fund(s). And again, it will be up to the member whether they pay it personally or withdraw it from their super.
However, there are some significant changes:
- There will now be two thresholds – $3 million and $10 million.
- There will be an extra tax of:
- 15 per cent on the earnings associated with the proportion of the member’s total super balance that’s over $3 million, plus
- a further 10 per cent, thus bringing the total to an extra 25 per cent, on the earnings associated with the proportion of the member’s total super balance over $10 million. This second tier is new.
- Both the $3 million and $10 million thresholds will be indexed to inflation, albeit not every year. Like a lot of other limits, they will rise in increments of $150,000 and $500,000 respectively.
- Earnings will be calculated by the super funds themselves. When the ATO identifies someone who is subject to the measure, it will contact the fund and ask for more information.
- The earnings amount will be “based on its [the fund’s] taxable income” and calculations will be “closely aligned to existing tax concepts”. It looks like there will be scope for funds to come up with something that is fair and reasonable, rather than having to report the exact amount for each member (the exact calculation is difficult for some large funds). But most importantly, earnings for this purpose won’t include unrealised capital gains.
An example
James has $15 million in super at 30 June 2027. That means:
- 80 per cent of his super is over $3 million ($15 million less $3 million, or $12 million. That’s 80 per cent of his total super balance of $15 million), and
- 33 per cent of his super is over $10 million ($15 million less $10 million, or $5 million. That’s 33.33 per cent of his total super balance of $15 million).
During the year, his super earned a combination of income and his fund also realised some capital gains. The share of this attributed to James is $500,000. The fund has already paid 15 per cent tax on all of its taxable income. In addition, James would receive a Division 296 tax bill.
It would be:
(15% x 80% x $500,000) + (10% x 33.33% x $500,000) = $76,665.
So what does this mean?
Unrealised versus realised gains
Removing tax on unrealised gains is obviously a very big deal and overall extremely positive.
One thing worth noting is it’s unclear whether the new definition of earnings will capture:
- just gains that build up after 1 July 2026 and are realised in the future, or
- all gains realised in the future regardless of whether they built up before or after 1 July 2026.
Remember, a key feature of the original version of the measure was it only ever taxed growth after the start date of the tax, initially planned for 1 July 2025. We will need to see the detail to know how the new version will work and the difference is important.
For example, imagine Tim is the only member of his SMSF. The fund owns an asset it bought years ago for $2 million. Say it’s worth $4 million at 1 July 2026 and is then sold for $4.5 million in 2026/27. Under the original system, the earnings captured for that asset in 2026/27 would have been $500,000 ($4.5 million less $4 million). Under the new system, will the earnings be the same or will they be based on $4.5 million less $2 million, that is, the actual realised capital gain?
Discounting capital gains
The devil will be in the detail here. Normally, super funds don’t pay tax on the whole capital gain when assets are sold that have been owned for more than 12 months as there is a one-third discount. In the example above, Tim’s SMSF wouldn’t pay tax on $2.5 million ($4.5 million less $2 million), it would only pay tax on two-thirds of this amount or $1.67 million.
At this stage, the fact sheet talks conceptually about aligning the definition of earnings to normal tax principles and it being based on taxable income. That doesn’t necessarily guarantee the discount will be taken into account. If we had to speculate, we’d say it probably will, but we’ll be watching out for that.
Pensions
Most members with more than $3 million or $10 million in super have pensions. Normally their fund’s taxable income is reduced because some of its revenue, including realised capital gains, is exempt from tax. I wonder how the government will allow for that. Again, the fact the information we have is conceptual rather than specific doesn’t answer this question, so watch this space.
Will the total super balance calculation still change?
One good thing with the old version of Division 296 was it included a change to the way in which the total super balance was calculated for people with:
- certain limited recourse borrowing arrangements, and
- anyone with defined benefits.
Believe it or not, the defined benefit change was actually a good thing for most people with defined benefit pensions as it would have effectively lowered the value placed on their defined benefit pension. It wasn’t so great for those with accumulation balances and there were both winners and losers there. It would be nice if that change made a reappearance in the new legislation. I expect this to be the case since it will still be important to place a reasonable value on members’ total super balances to determine whether they’re over the $3 million and $10 million thresholds. But let’s watch out for the detail.
Should we be relieved?
Actually yes. This is a better-designed measure. Taxing unrealised capital gains would have put people in the invidious position of receiving a liability when they didn’t necessarily have the cash to pay it. That was fundamentally flawed.
Does that necessarily mean everyone will be better off under this approach versus the previous one? No, there will be some losers.
Certainly those with over $10 million will now seriously consider the role of super for some of their balance as their extra tax has gone up from 15 per cent to 25 per cent, bringing the total to 40 per cent on a proportion of their earnings. This is even more important if the new earnings definition doesn’t allow for discounting of capital gains.
Even those with more than $3 million in super, but less than $10 million, who have very large capital pre-1 July 2026 gains built up already, might need to give this some thought. If there is no carve-out for capital gains accumulated before 1 July 2026, would they be better to realise their gains this year before the new rules come in?
As with any super change, there is more to think about and I can’t wait to read the actual legislation. I just wish we didn’t have to wait until next year to see it.
This article first appeared on www.heffron.com.au.
Meg Heffron is managing director of Heffron.
