An unrealised capital gain refers to an increase in the value of an asset that has not yet been sold or disposed of. In Australia, capital gains are taxed on assets which have increased in value when they are sold and the gain is realised, however the proposed Treasury Laws Amendment (Better Targeted Superannuation Concessions) Bill 2023 (Cth) will tax ‘unrealised capital gains’ on assets held in superannuation funds with balances over $3 million. The bill was in two (2) parts, with the first dealing solely with the imposition of the new tax, and the second explaining the proposed changes.
Better Targeted Superannuation Concessions Bill 2023 (Cth)
On 28 February 2023, the Treasury Laws Amendment (Better Targeted Superannuation Concessions) Bill 2023 (Cth) (Bill), was passed by the House of Representatives and, as at the date of this article, is presently before the Senate. With the recent dissolution of Parliament, the Bill has lapsed, meaning that it would have to be reintroduced to be passed.[1]
The Bill, if passed, will insert a new Division 296 into the Income Tax Assessment Act 1997 (Cth) (ITAA) that imposes an additional 15% tax on superannuation earnings, applied to the balance of an individual’s account where the balance exceeds $3 million (Threshold) in that income year. This means that earnings on balances below the Threshold will continue to be taxed at 15%, while earnings on balances above the Threshold will be taxed at 30% (Extra Super Tax).
Section 307-230 of the ITAA will be amended to broaden the superannuation interests that can be included when calculating the total superannuation balance, which will consequentially increase calculated yearly earnings.[2]
The Extra Super Tax will consider 15% of the total amount of concessional contributions as earnings when calculating fund balances, however non-concessional contributions will be exempt.[3]
The definition of ‘total superannuation balance value’ will also be inserted at section 307‑230A of the ITAA as follows:[4]
“(1) The total superannuation balance value, at a particular time, of a *superannuation interest is:
(a) if the regulations specify a value, or a method for determining a value, for the purposes of this paragraph—the specified value, or the value determined in accordance with the specified method; or
(b) otherwise—the total amount of the *superannuation benefits that would become payable if:
(i) the individual to whom the superannuation interest relates had the right to cause the superannuation interest to cease at that time; and
(ii) the individual voluntarily caused the superannuation interest to cease at that time.“
[Bold is our emphasis]
This means that a superannuation balance will include the speculative proceeds of assets that would be payable if sold, triggering a tax on the unrealised capital gain.
Negative superannuation earnings from balances above $3 million would not be refunded, rather carried forward and used to reduce the amount of future superannuation earnings subject to the Extra Super Tax.
A superannuation fund required to pay the Extra Super Tax will have the choice of paying this liability by releasing amounts from their superannuation or paying it personally.
How will the Bill impact your superannuation fund?
To help understand the potential impacts of the Bill, consider a Self-Managed Superannuation Fund (SMSF) which owns one (1) property as its sole asset. On 30 June 2025, the property is valued at $4 million, and at the end of the next financial year (30 June 2026), $5 million.
The value of the property in the fund will have increased by $1 million, and the value of the asset would exceed the $3 million threshold by $2 million. The Extra Super Tax would be $60,000 tax on $400,000 worth of taxable earnings on the superannuant, in addition to pre-existing tax obligations. Assuming concessional contributions of $20,000, the Extra Super Tax would consider $3,000 or 15% of this to be taxable, incurring an additional $450 tax liability.
Even though the property hasn’t been sold, the superannuant must pay $60,000 in tax on the “paper increase” in value. If by 30 June 2027, the property value decreases from $5M to $4.5M, the $60,000 already paid on this unrealised gain will not be refunded, only the $500,000 loss carried forward to offset future earnings and tax liabilities.
Implications – taxing unrealised capital gains is just wrong!
Despite purporting to distribute wealth for social equity and sustainability,[5] the Bill would have significant detrimental impacts on superannuation and retirement planning including:
- Superannuant inequity: the impacts will be disproportionately severe on superannuants in or approaching retirement, harming members in their most vulnerable investment phase.
- Decreased public confidence: uncertain taxation policies undermine trust in the superannuation as a reliable retirement savings vehicle.
- Disincentivising participation: punitive taxation policies will result in high-net-worth superannuants seeking alternative investment structures, counteracting the intended effect of the Bill.
Links and further references
Legislation
Income Tax Assessment Act 1997 (Cth)
Treasury Laws Amendment (Better Targeted Superannuation Concessions) Bill 2023 (Cth)
Further information about unrealised capital gains
If you need advice on unrealised capital gains, contact us for a confidential and obligation free and discussion:
Malcolm Burrows B.Bus.,MBA.,LL.B.,LL.M.,MQLS.
Legal Practice Director
T: +61 7 3221 0013 (preferred)
M: +61 419 726 535
E: mburrows@dundaslawyers.com.au
Disclaimer
This article contains general commentary only. You should not rely on the commentary as legal advice. Specific legal advice should be obtained to ascertain how the law applies to your particular circumstances.
[1] Parliament of Australia, Standing Orders of the Senate (as at 13 May 2020) SO 136.
[2] Treasury Laws Amendment (Better Targeted Superannuation Concessions) Bill 2023 (Cth) Sch 2, Items 3-5.
[3] Ibid Sch 1, Items 15 (s296-55).
[5] Explanatory Memorandum, Treasury Laws Amendment (Better Targeted Superannuation Concessions) Bill 2023 (Cth).
Related tax law insights
-
What is my superannuation taxed at?
This article summarises the Australian Privacy Principles (APPs) and the importance of having a data destruction policy (DDP) in place. It outlines the steps to take when destroying or deidentifying personal and sensitive information, and the consequences of not doing so.
-
Division 293 tax – explained
Learn about the Division 293 Tax, a 15% additional tax on pre-tax super contributions over $25,000 for individuals earning over $250,000. Understand the criteria, how it is applied and related tax articles.
-
Transfer duty exemption for small business restructuring
The Queensland Commissioner of State Revenue has issued a public ruling outlining potential exemptions from transfer duty for eligible small business entities undergoing a restructuring. Get the full details of the ruling, its implications and eligibility requirements here.
-
Division 7A ITTA 1936 (Cth) – compliance & consequences
This article provides an overview of Division 7 of the Income Tax Assessment Act 1936 (Cth), covering advances of moneys and loans between private companies and its shareholders/associates, exceptions to these, and requirements for a compliant Division 7A loan agreement. The implications of failing to have a compliant agreement are explained in this article.
-
Value shifting in commercial transactions explained
Value shifting is an important tax consideration in Australia. This article outlines the general regime and exemptions, as well as Australian Taxation Office (ATO) resources for guidance.
-
Which entities qualify for the R&D Tax Incentive?
Companies can benefit Australia through the Research and Development Tax Incentive (R&D Tax Incentive), which offers a tax offset. Eligibility depends on an entity’s status. Trusts can also access the incentive via Trust Rollover or licence agreement.
-
Transfer duty implications for loans
Transfer Duty in Queensland: does it apply to loans? This article explores the Duties Act 2001 (Qld) and what constitutes a dutiable transaction and dutiable property. Find out if transfer duty applies to loans and learn more about the implications of loan agreements.
-
Transfer duty and issuing units in a unit trust
Discover how Queensland transfer duty is applied to dutiable transactions and what it means for your trust. Click through to the article for a comprehensive guide to the Duties Act 2001 (Qld).
-
Eligibility criteria for the Trust Restructure Rollover
Thinking of restructuring your trust for some reason? While there are certainly a number of commercial benefits in transitioning from a trust into a company, a common pitfall is failing to acknowledge potential liability for Capital Gains Tax (CGT) or address potential liability for state based transfer duty (Stamp Duty).
