$3 million super tax faces uncertain future amid political opposition

Amid the rush of more than 30 laws that passed through the Senate at the end of the sitting year, one bill faded into the background, seemingly unwanted and unloved by everyone.

Known as the proposed $3 million superannuation tax or more specifically as Division 296 tax, the future of this law now sits very much in the balance.

Should the Labor Government lose office at the 2025 election, that would be the end of the proposal, given that the Coalition has been implacably opposed to this new tax all along.

Getting the numbers to pass the bill in the Senate before the election seems unlikely and even if Labor emerges triumphant after the next election, there is every chance that they will still find it difficult to assemble the votes to get this bill through the Senate.

Opposition to the measure remains strong

None of this will come as much of a surprise to those who have opposed this bill, not so much for the fact that it reduces the incentive to accumulate more than $3 million in super but because of what many see as significant design flaws with the proposal.

The first and most major of these is that this tax turns widely understood tax law completely on its head by taxing unrealised gains.

Normally, capital gains are only assessed after sale, so assessing unrealised, or unsold, gains is highly problematic.

Not only might the gain be temporary or a “paper gain” and drop back after the extra tax has been paid but the very act of taxing unrealised gains changes the way super funds need to be invested, with extra cash held to pay tax bills.

Unrealised gains designed to help big funds?

Many of those in the super industry believe this feature of the tax was specifically designed for administrative ease for large super funds rather than for any reasons related to fairly dealing with those with large super balances.

While SMSFs can fairly easily work out realised gains at the member level, many of the large, public funds do not have the systems in place to calculate realised gains at the member level.

That, so the theory goes, is why the idea of taxing unrealised gains was arrived at because that was the most practicable way that the large funds could assess the amount above $3 million for members’ funds.

SMSFs hit hardest if tax introduced

Ironically, those funds best able to assess realised gains at an individual level – SMSFs – were the very funds that would struggle to cope with the concept of unrealised gains given that many SMSFs contain large, lumpy assets such as farming land or large property assets.

The other really concerning thing about the proposed Division 296 tax was that the $3 million cap above which the extra 15% of tax was payable was not indexed at all.

In other words, it would remain at $3 million well into the future, meaning that the super ceiling above which extra tax would become payable would have been shrinking in real terms, capturing more people in the tax net every year and clawing back extra revenue over time.

Lack of indexation and unrealised gains biggest sticking points

It is no secret that these two aspects of the tax – the taxing of unrealised gains and the indexation of the $3 million point at which it cuts in were the primary negotiation tools that could be used to get the tax across the line.

Some Senators who have opposed the Bill were more likely to support it if the taxing of unrealised gains was removed and the $3 million cap was indexed for inflation.

As it stands however, although the money to be raised by the tax has already been baked into the forward estimates, the likelihood of this tax ever being applied from the starting date of July 1, 2025 is becoming more remote with each passing day.

This is not the hill to die on

When it comes as a hill to die on, it seems the $3 million super tax is a long way down the list for the current Labor Government.

Instead, they are showing every indication of letting this measure – which passed through the House of Representatives back in October – become a footnote in history rather than a law that will apply to Australians.

It could also become a precursor to an amended law depending on how and when the next Federal Election is fought.