A ghost tax by another name: That’s the consensus take on Labor’s plan to levy a super tax on super funds exceeding $3 million. Labor’s plans to introduce this tax (aka Division 296 tax legislation) were originally blocked by independent senators. However, the party’s total control of the Senate - along with Greens support - post election means there’s nothing stopping this legislation coming into effect on 1 July this year.
In short, the government is planning to increase the concessional tax rate on super account earnings in the accumulation phase from 15% to 30% for balances above $3 million.
As it currently stands Labor’s proposed tax increase would affect about 80,000 super fund account holders.
Meanwhile, it remains unclear how the new tax will relate to defined benefit pensions.
However, if the Greens get their way the threshold for this new tax will be lowered from $3 million to $2 million; ASIC data suggests around 1.8 million Australians will fall within the crosshairs of this policy.
Then there are another 780,000 who are within a cooee of crossing this line.
They will also be able to carry forward any loss as an offset against their tax liability in future years.
Taxing unrealised gains
However, the more vexing issue for objectors to Division 296 are plans to not only tax gains made but also on gains not yet realised.
Admittedly, there’s some support for increasing the tax from 15% to 30% - especially where investing in super is more about tax minimisation than retirement savings.
However, there’s broad consensus that taxing unrealised gains held in super, including shares or property, violates fundamental tax principles.
Plans to do so are a significant pivot from the status quo where APRA-regulated funds and SMSFs only ever pay capital gains tax once the asset is sold and the gain is crystallised.
Financial commentator and former adviser Noel Whittaker argues that a sensible government would scrap the paper gains component entirely – confident that, as the assets are sold over time, the tax will be collectively done away with.
Liquidity problems
What makes this legislation problematic, adds Whittaker, is that it could lead to liquidity problems down the line.
He expects the tax on unrealised capital gains to be particularly onerous for self-managed super funds (SMSF), especially given that they hold large and illiquid assets – like a farm or business property - that can’t be easily converted into cash.
Assuming a SMSF lacks the liquidity to pay the tax, Whittaker foresees a member being left liable to pay it personally.
“You’re stuck with whatever paper gains the ATO decides to tax, even if markets crash the next day,” notes Whittaker.
In the worst case scenario, a SMSF trustee might be forced to prematurely sell assets to meet the fund’s tax liability.
Based on back of the envelope calculations, if an individual’s super account grew from $3.5 million to $4 million during 2025/26 – and the entire $500,000 increase came from growth (or income) from the super fund’s investments - the Division 296 tax bill for 2025/26 would be $18,750 (plus any tax paid by the fund itself).
However, to appease SMSF concerns, the government’s proposal gives taxpayers 84 days to pay their tax liability instead of the usual 21 days.
$40 billion within a decade
Motivated by pressure on the federal government’s budget and bottom line, the new tax is expected to generate $2.3 billion in year one and rise to an estimated $40 billion over the next decade.
In further justification of the proposed tax changes, Treasurer Jim Chalmers reminded Australians that most benefits of the concession flow to the wealthier households who are not eligible for the pension.
Based on Chalmer’s numbers, Labor’s tax policy affects 0.5% of people with balances above $3 million, while still providing concessional tax treatment for people in super.
Based on Treasury numbers, the current super concession to the federal budget closely mirror the cost of the age pension at $50 billion.
Keating disapproves
Meanwhile, political opposition to Labor’s new super tax is also mounting, with former treasurer Paul Keating – lauded as the orchestrator of superannuation in Australia – joining a chorus of dissenters.
Keating believes a plan to double the tax on retirement savings over $3 million could see super deteriorate into a low- and middle-income pension scheme which would undermine community confidence in the $3.9 trillion savings system.
At face value, long-standing super industry consultant Stephen Huppert, believes taxing very large [super] balances seems reasonable.
He, however, believes that the proposed implementation is inappropriate, especially because the threshold is not indexed.
“I don’t have a firm view on the best method or frequency of indexation… but I think more work is needed on the detail,” Huppert told Azzet.
Bracket creep
Lack of indexation introduces bracket creep, which over time draws a growing pool of super funds into the catchment of this new tax.
Tim Steele, CEO of Class, believes data from the Class Annual Benchmark Report highlights the complexities surrounding the Division 296 proposal.
“It’s creating a cap which means people are going to have to plan differently about how they think about their total superannuation balance,” he said.
“[They will be] trying to predict what growth might be, whether they should be taking withdrawals and then also thinking about the amount of cash they need on reserve.”
Based on Steele’s analysis, all of his 16,500 members would be affected by the proposed Div 296 tax and on average would pay just under $50,000 tax for each member.
Then there are another 5% of members - currently sitting in the $2–3 million bracket – which Kate Anderson, general manager of Operations at Class says presents the next generation likely to be impacted by the Division 296 tax.
“Indexation, even moderate inflation of just 2% per annum would push the cap to $3.5 million within eight years and $4 million [within] 15 years,” she said.
