You guessed it, another tax! This time the government is looking to tax unrealised gains – Yes – they will tax you on imaginary future profits, it doesn’t matter if you actually made money – the government will slap your fund with a 30% tax NOW!
The idea of taxing superannuation balances above $3 million first came up in early 2023. Like COVID-19, it never really went away. The response to COVID sent our country broke and now we will see a huge exodus of capital under the Division 296 tax.
The government tried to get this passed before the last election, but it didn’t make it through the Senate. Now, with the Greens holding the balance of power, it looks likely to go through and will set the framework for the world’s first unrealised gains tax. The Greens even pushed to go further by suggesting lowering the $3 million threshold to $2 million and banning SMSF borrowing altogether.
Under the current proposal, Division 296 imposes an extra 15% tax on the proportion of earnings relating to your total super balance above $3 million. When they say “earnings”, they don’t just mean interest or distributions—it’s all superannuation earnings, including unrealised gains. As you can expect – Redwood condemns this tax – with every other tax out there, after all we are based in Victoria, where land tax has skyrocketed to support the state governments spending spree.
Didn’t sell anything? Didn’t cash out? Never saw a cent? Tough luck—the government took a peek at your account, saw some numbers went up, and decided you owe them a slice of your hypothetical success. How will they know? well there is digital ID!
Picture this: You’re the only member of your SMSF. You have a farm in your fund worth $3 million on 30 June 2026. You don’t contribute, you don’t withdraw (maybe you can’t even access it because you haven’t met a condition of release i.e. 60 years of age). A year later, on 30 June 2027,the farm is revalued at $4 million. Congratulations—you now owe $37,500 in extra tax, even if you didn’t sell anything. Outrageous right, you are getting taxed on something you own but have not sold.
Calculation:
Only the portion of your super balance above $3 million is taxed.
- Total super balance at year end: $4 million
- Excess over threshold: $1 million
- Proportion of earnings attributed to excess: $1M ÷ $4M = 25%
- Total earnings (unrealised gain): $1 million
- Earnings attributable to excess: $1M × 25% = $250,000
- Tax: $250,000 × 15% = $37,500
No cash in the SMSF to pay it? The government says you can pay it from your personal account. No cash there either? Maybe you’re resting the land? Tough luck—you might have to sell the farm. But maybe you can’t sell just a paddock. And if you do sell, there could be capital gains tax to deal with too.
Fallout
Well this isn’t rocket science to the 700,000 SMSFs out there and their 1.2 million members – you will be forced to liquidate assets and most likely the ones you don’t want to sell at the worst time to cover this tax, this may include your crypto – your farm, your shares. The government is selling it today as a “rich tax” and you may be thinking it wont effect me, but as you have compulsory contributions as well as inflation and assets bubbles, the balance will be $3 million sooner than you think. Further the government may reduce the threshold – just look at Victoria’s land tax scam which applies to all properties.
Think $3 million won’t affect you?
It may – over time, $3 million is not indexed. Another controversial part of Division 296 is no indexation of the $3 million threshold. That means more people will fall into this trap over time. The government says it will only affect about 80,000 members at first—but that number will grow fast.
For example – if someone starts working at age 20 and earns the median full-time wage of $102,840, their employer contributes 12% superannuation guarantee ($12,340.80). If their wage grows by 3% per year and their super earns 7% per year, over 40 years, they’ll end up with a super balance of about $3.83 million—without ever making extra contributions. That’s above the Division 296 threshold. Who’s to say the threshold will still be $3 million?
Who is exempt from Div 296?
You guessed it, politicians. If they could not rub dirt in our face any more – politicians have excluded themselves from this world first tax grab. It’s no wander why Aussies are disenchanted with politics.
Redwood prediction
Mass exodus of capital – in the next 12 months, SMSF members will restructure their investments, move to different structures such as Family Trusts and Investment Companies and even move funds offshore chasing the best tax shelter – putting more pressure on economic growth which since 2019, has been largely driven by the government sector. At the same time, the government will implement this framework and potentially apply to other structures and investment classes, maybe your family home!
We’re not saying panic-sell your assets especially since this legislation hasn’t passed yet and is still theoretical. At Redwood, we’re for super – taxing unrealised gains is a disastrous and stupid idea. Time will tell, however we have seen that Aussies have been lapping up the continuous government overreach since COVID. Make no mistake – this is a slow-motion train wreck, for the world to see.
Disclaimer – The content has been prepared by Redwood Advisory Pty Ltd without taking account of the objectives, financial situation or needs of a particular individual and does not constitute financial product advice. This article should not be considered personal financial advice as it is intended to provide factual informati