Money
How to make sure you avoid the new 15% super tax
The face of retirement planning is about to change significantly – and we have your update.
By Nicole Pedersen-McKinnon
Most of the hoo-ha in the recent federal election campaign was about three things: one, teeny tax sugar hits (it was won with a threshold tweak and an automatic $1000 deduction, both not until July 2026); two, proposed help for first homebuyers (all will be able now to get into the market with just a 5 percent deposit); and, three, the population’s position on nuclear.
But lurking in the background of the kerfuffle over all of that was something both controversial and potentially personally costly: Division 296.
Already passed in the lower house, this is a proposal to tax the gains you make in your superannuation fund, even if you haven’t sold the investments.
And it’s now full speed ahead… with the government claiming that catch-all winner’s notion: a mandate.
What is the policy?
Super is a hugely tax-advantaged vehicle… why savvy Aussies pay in extra.
You can get at it tax-free after meeting a condition of release. You can pay in money before tax and wear only the 15 percent contributions tax. And, right now, the earnings in your fund - while you are growing it - are taxed at only 15 percent tax.
That last part is what’s set to change- super investments over $3million ($2million if the Greens get their way in the Senate) will be taxed at 30 percent.
What is more, this tax will for the first time ever apply to gains… and also to gains made only on ‘paper’ because your fund still holds the investments. The technical expression for this is unrealised capital gains.
And each and every year.
What’s more, there is no credit for this tax you have already paid. When you sell assets and realise a profit, you’ll pay capital gains tax… again.
So, it’s also a form of double taxation the likes of which we have never seen in Australia.
But looking at the immediate, from July 2026, the end of the next tax year, affected Aussies will need the money to foot an annual super tax bill.
And more people than you might expect will be impacted too.
Who will be affected?
The government has said that only about 80,000 super members, the top 0.5 percent, will be liable.
But the new tax, which is forecast to raise $2.3 billion that first full year, will affect far more people than initially understood, more than the who-cares-high $3 million threshold might suggest.
The fundamental reason is that, whatever trigger threshold is decided, it’s not currently indexed. That means it could, and probably will, stay the same forever.
A bit like taxation bracket creep, more and more people will be caught in the higher-paying net.
Indeed, modelling by AMP Capital deputy chief economist Diana Mousina shows that even millennials and younger generations will ultimately have to pay - someone who is 22 years old today can be expected to accumulate more than $3million in super by age 67, and that’s the case if they only ever earn an average wage.
The calculation assumes the worker is on $98,000 a year and that this increases by 3 percent annually, while the super fund makes a 6.5 percent-a-year return. No extra contributions are made.
The person would end up with $3.6 million in super and be liable for $29,300 in tax a year, $5400 extra for the assets over $3million.
So you can see that, over roughly 40 years, the impact of wages inflation and the power of compounding will result in hugely larger end super balances. (And, of course, these will be necessary to keep up with price inflation.)
Even today, the imbalance of many couple’s super funds - usually due to one person taking primary responsibility for raising the children - is acute.
It’s common for one person to have very little and for the family to expect to be largely reliant in retirement on the person with a lot.
Then there is the enormous problem Division 296 poses to self-managed super funds. Yes, these usually have higher balances (the mooted $3 million trigger amount applies per member).
But the bigger issue is they are often started by small business owners looking to put business premises, for example, within the tax-advantaged environment. Or farmers whose funds have purchased their farms.
Any gains in those properties in a given year will now mean they need to have cash in their fund to foot a bill.
The taxing of unrealised gains could become a 'super' big deal for you... so let’s get into the strategies to deal with it.
How can you avoid it?
First of all, until we see what legislation passes the Senate - it is probably a given that it will get through in some form - you shouldn’t change anything.
There’s too much risk you’ll second-guess the government incorrectly and incur inadvertent balance damage.
The exception might be SMSF members, for whom it could be worth getting any property valued on June 30 this year - the crucial date for the first June 30, 2026, liability - at the highest possible amount.
If the law passes as written, you will have mitigation options for other assets, inside and outside of super.
Options inside super: It is the gains that are being taxed, so a fund that makes less, pays less.
Of course, this is contrary to growing your fund balance and the entire point of super.
But your super fund could become the core income-earning part of a core and satellite portfolio structure. We will get into the satellite part in the next ‘outside’ investments section.
The beauty of this approach is that income will ensure there is ready cash to pay any annual bill for unrealised gains, saving you from having to make tax-driven sales of growth assets that may not be at a good time in the market.
If you’ll get anywhere near the cap, it will probably become more attractive to skew your super fund to liquid assets.
Options outside super: If you are forecast to hit the threshold for Division 296, super won’t be the most tax efficient place for additional wealth: non-super structures will be.
This brings us back to the ‘satellite’ I mentioned earlier; you could hold a bit, or a lot, of the investments designed to make strong gains - so growth assets - outside of super.
Though you won’t get the super tax advantages, if you are going to give up more than this due to the taxing of unrealised gains, it will be just sensible.
And setting up trusts and beneficiary companies will become more appealing.
You can also consider vehicles that are still concessionally taxed, like insurance bonds.
Direct property investments may become a favoured super alternative as well.
These strategies, however, won’t be much use once you have already exceeded the cap: your money will be stuck in super - and your fund paying the annual bill - until you hit 60 and retire or you turn 65.
But you will then, once you can get your super out, have extra options.
Firstly, with a more-than $5 trillion intergenerational wealth transfer underway, and parents watching adult children struggle with the cost of living and house prices, you could gift money early as a ‘living inheritance’.
Even ahead of Division 296, the Bank of Mum and Dad is said to be between the fifth and ninth largest in Australia.
Here, you need to be careful of the deprivation of assets rules that are meant to stop retirees giving away their money to qualify for the government age pension.
Gifts under $10,000 a year or $30,000 over five years don’t attract the attention of Services Australia, but anything above that will still count towards the assets test (assessed at market value and counted for five years). It will also affect the income test: the value of the deprived asset will be deemed to have income.
But it may be that a gift wouldn’t bring you down near age pension entitlement anyway… and would save you a bunch of Division 296 tax while also keeping money in the family.
Options other than giving cash include taking the money out of your super and putting it into your children’s or grandchildren’s super.
You could also, once you’ve satisfied a condition of super release, start an account-based pension and so stop paying any tax within the fund… but this is subject to the transfer balance cap limit of $2million (2025-26 threshold).
A final word
There is much talk about whether this latest super raid - because let’s not forget there have been many of them - represents a broken social compact; the government asked us to self-fund our retirements and offered us generous tax breaks to do so.
With more than $4 trillion now sitting in our super accounts, and the Federal Budget in deficit, skimming off the top is perennially tempting.
But what it underlines is the need to diversify both your investments and your investment structures.
The face of retirement planning may be about to change significantly.
Stay tuned to Citro for updates.
Feature image: iStock/courtneyk
This article contains general information only and is not financial advice. It is not intended to influence readers’ decisions about any financial products or investments. Readers’ personal circumstances have not been taken into account and they should always seek their own professional financial and taxation advice that takes into account their personal circumstances before making any financial decisions. While this article has been carefully prepared, Citro cannot guarantee accuracy and all information should be verified with official sources.
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