Well. All we have to go on is an announcement and Fact Sheet but it seems the Government has, at last, recognised that taxing unrealised gains is madness no matter how you dress it up.
It seems the Government has listened to criticism of the two most egregious features of their 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 (ie 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 – even 1 July 2026 isn’t that far away.
What does the new approach look like?
Philosophically some things haven’t changed. The tax is still proposed to be an extra tax over and above normal 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:
An example
James has $15m in super at 30 June 2027. That means:
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% 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?
As you’d expect we have some thoughts.
Unrealised vs realised gains
Removing tax on unrealised gains is obviously a very big deal – and overall extremely positive.
One thing worth noting, though : it’s not clear whether the new definition of earnings will capture :
Remember a key feature of the “old” version was that it only ever taxed growth after the start date of the tax (which was to be 1 July 2025 in the original plans). 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 $2m. It’s worth $4m at 1 July 2026 and is then sold for $4.5m in 2026/27. Under the old system the “earnings” captured for that asset in 2026/27 would have been $500,000 ($4.5m less $4m). Under the new system earnings, will the earnings be the same or will they be based on $4.5m less $2m (ie, 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 they sell assets they’ve owned for more than 12 months – there is a discount of 1/3rd. In the example above, Tim’s SMSF wouldn’t pay tax on $2.5m ($4.5m less $2m), it would only pay tax on 2/3rds of this amount ($1.67m).
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 $3m or $10m in super have pensions. Normally their fund’s taxable income is reduced because some of its income (including realised capital gains) is exempt from tax. I wonder how the Government will allow for that? Again, the fact that the information we have is conceptual rather than specific doesn’t answer this question – so watch this space.
Will we still see a change to the way in which total super balance is calculated?
One good thing with the old version of Division 296 was that it included a change to the way in which total super balance was calculated for people with:
Believe it or not the defined benefit change was actually a good thing for most people with defined benefit pensions (it would lower the value placed on their defined benefit pension). It wasn’t so great for those with accumulation balances – there were both winners and some losers there. It would be nice if that change made a reappearance in the new legislation. I expect it will since it will still be important to place a reasonable value on members’ total super balance to work out whether or not they’re over the $3m and $10m thresholds. But let’s watch out for the detail.
Should we be relieved?
Actually yes. This is a better design. Taxing unrealised capital gains put people in the invidious position of receiving a tax bill when they didn’t necessarily have the cash to pay for it. That was fundamentally flawed.
Does that necessarily mean everyone will be better off under this approach vs the old one? No. There will be some losers.
Certainly those with over $10m will now seriously consider the role of super for some of their balance – their extra tax has gone up from 15% to 25%, bringing the total to 40% 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 $3m in super (but less than $10m) who have very large capital gains built up already (pre 1 July 2026) might need to give this some thought. If there is no carve out for capital gains built up 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.
To access resources and support for the Division 296 tax, visit our dedicated landing page here.