The Australian Labor government’s plan to tax unrealised gains in superannuation accounts over $3 million has stirred a great deal of debate. With the federal election just around the corner, this policy is firmly under the spotlight. Australian business owners, particularly those managing self-managed super funds (SMSFs), need to understand exactly what this proposed tax means for their retirement savings and financial future.
This detailed guide explains clearly what this proposal involves, how it could affect you as a business owner, and what practical steps you can take right now.
What Exactly Is the Proposed Tax?
Currently, if your superannuation fund owns assets like shares or property, you pay tax only when you sell those assets and make a profit. The Labor government’s new proposal, part of the Treasury Laws Amendment (Better Targeted Superannuation Concessions) Bill 2023, changes this dramatically. If your total super balance exceeds $3 million, you’ll pay tax on the annual increase in your asset values, even if you haven’t actually sold those assets. In simple terms, you’d be taxed on gains that exist only on paper.
For example, say your super fund has $3.5 million at the start of the financial year, and by year’s end, its value has risen to $4 million. Currently, you’d pay no extra tax unless you sold those assets. Under Labor’s proposal, you would face an extra tax bill on that $500,000 increase, even without any cash being generated. This doubles the tax rate from the usual 15% to 30% on the gains above the $3 million threshold.
Who Will Be Affected, and Why Does It Matter?
Initially, the government estimates fewer than 80,000 Australians will be impacted, roughly 0.5% of all super account holders. However, this number will grow quickly because the $3 million cap isn’t adjusted for inflation. Over time, as asset values and super balances rise, many more Australians could find themselves paying this higher tax rate.
In other words, what the government considers a “high balance” today might become quite common in the future, pulling many more average Australians into this higher tax bracket unintentionally.
Why Are Business Owners Particularly Worried?
Business owners often invest heavily through SMSFs. Typically, these funds hold long-term, valuable but illiquid assets like commercial property, farmland, or shares in private companies. These investments usually grow in value slowly over the long term and don’t always generate significant cash flow each year.
The proposed tax creates three main concerns for business owners:
Liquidity and Cash Flow Problems
The main issue is that many assets held by business owners inside SMSFs don’t produce enough cash to cover an annual tax on unrealised gains. Imagine your farm or commercial property’s market value rising sharply, but the rent or business income stays the same. Suddenly, you might owe tens of thousands of dollars in tax with no extra cash to pay it. You could be forced into selling an asset earlier than planned or borrowing money just to cover this tax bill.
Forced Asset Sales and Impact on Family Businesses
If business owners need to sell assets prematurely to pay tax bills, it undermines the purpose of superannuation as a safe retirement fund. This could seriously disrupt long-term family plans, especially for family-owned farms or businesses, making succession planning more complicated and stressful.
Yearly Valuation Headaches
Every year, you’ll have to value your business or commercial properties to determine how much they’ve increased in worth. Annual valuations of private businesses and properties aren’t easy, cheap, or straightforward. This requirement adds ongoing costs and administrative hassles for business owners, diverting time and resources away from actually running their business.
Broader Economic Effects
This new policy could also have wider impacts across the Australian economy:
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Less Risk-Taking and Innovation: Investors might shy away from higher-risk, higher-reward investments, choosing safer, lower-growth assets to avoid volatile tax bills each year. This shift could negatively affect economic growth, innovation, and job creation.
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Property Market Shifts: Some investors might move their money out of super into housing, because the family home remains free of these tax concerns. This could drive property prices even higher, making housing affordability worse for everyday Australians.
What Are Experts and Industry Groups Saying?
Several industry and business groups have strongly opposed the policy:
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The SMSF Association believes the tax unfairly targets business owners and retirees, disrupting well-established financial principles.
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The National Farmers’ Federation argues this policy could force farmers to sell land against their wishes, causing major disruption to rural communities.
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CPA Australia and Chartered Accountants ANZ criticise the proposal as impractical, highlighting the unfairness of taxing people on profits they’ve not actually made yet.
However, supporters of the tax say it’s about fairness, pointing out that existing superannuation tax breaks mostly benefit wealthier Australians. They argue this proposal will raise money that could fund services for lower-income retirees.
Possible Amendments and Alternatives
Given these concerns, some practical changes have been suggested, including:
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Indexing the Threshold: Adjust the $3 million limit annually for inflation or wages, ensuring average Australians aren’t caught in this net over time.
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Tax Realised Gains Only: Tax profits only when assets are actually sold, not based on yearly changes in market value.
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Providing Relief for Losses: Allowing refunds or credits if asset values drop after you’ve paid tax, making the system fairer.
The government hasn’t adopted these alternatives yet, but they’re likely to be debated further.
Practical Steps Business Owners Can Take Now
As this issue unfolds, here’s how business owners can best prepare:
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Review Your Investments: Take a close look at your superannuation investments and see how much risk you might face from unrealised gains tax.
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Prepare for Liquidity Needs: Build strategies to ensure you have enough liquid assets in your fund to cover potential tax bills without needing to sell long-term investments prematurely.
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Stay Up-to-Date: Keep informed and speak regularly with your financial advisors. Monitor policy developments closely so you’re not caught off guard.
How EEA Advisory Can Support You
At EEA Advisory, we specialise in helping Australian business owners navigate complicated financial landscapes, particularly during times of uncertainty. We understand how much this proposed tax could impact your retirement plans and your business.
We can support you by:
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Providing detailed analysis of your super fund’s exposure to potential tax.
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Developing liquidity strategies tailored to your specific situation.
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Advising on asset structures and investment choices to minimise negative tax impacts.
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Offering ongoing support and up-to-date guidance as this policy develops.
Our mission at EEA Advisory is simple: to help you plan effectively and protect your retirement savings, whatever changes may come.
Frequently Asked Questions
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How are unrealised gains calculated?
They’re calculated as the increase in your super fund’s total value over a financial year, minus any contributions or withdrawals. -
Can you get a refund if asset values fall later?
Currently, the proposal allows future-year loss offsets, but doesn’t include immediate refunds for previously paid tax on unrealised gains. -
Are there exemptions for certain asset types?
No, the proposal currently doesn’t provide exemptions for any asset type held within super.
Be Prepared, Stay Informed
This proposed tax on unrealised super gains could significantly reshape retirement and investment planning for many Australian business owners. Being informed and prepared is crucial.
At EEA Advisory, we’re here to help you stay ahead, understand the impacts, and develop practical strategies to protect your financial future.
Get in touch with EEA Advisory today to ensure you’re well-prepared, no matter how this legislation develops.
