By Rachel Waterhouse, CEO, Australian Shareholders’ Association

The Australian Shareholders’ Association (ASA) is urging the Federal Government to reconsider the proposed Division 296 superannuation changes, which would tax unrealised gains.

While presented as a measure targeting only high-balance accounts by increasing the effective tax on earnings above $3 million from 15 percent to 30 percent, the proposal raises broader concerns about the taxation of retirement savings in Australia. It risks undermining long-term planning, reducing fairness in the system, and affecting more Australians over time than initially anticipated.

The problem with taxing unrealised gains

These rules could also have broader consequences for investment behaviour. Being taxed on unrealised gains may discourage investment in high-growth and early-stage companies, particularly those with volatile share prices. Superannuation funds, both APRA-regulated and self-managed, are a major source of capital for these businesses, even if the exact level of investment is not publicly known. The prospect of tax on paper gains may lead funds to reduce their exposure, ultimately limiting capital flows to innovative sectors.

If gains are taxed during growth but no relief is offered when values fall, investors may become reluctant to hold long-term growth assets. This could undermine Australia’s innovation ecosystem and reduce capital formation across the economy.

The proposed Division 296 changes have sparked significant debate, with many arguing that they fundamentally shift how income is taxed by targeting unrealised gains. If the changes go ahead as they are, investors may need to find cash to pay tax on assets that have not yet generated any actual income.

Unrealised gains are increases in the paper value of assets that have not yet been crystallised into actual profits. Because the tax applies to these gains, investors may need to sell assets simply to generate the cash to pay it, even if they would prefer to retain those investments.

The implications are especially significant for self-managed superannuation funds (SMSFs), particularly those holding illiquid assets such as property, infrastructure or private equity. These funds may be forced to sell investments each year just to meet tax liabilities, driving short-term decisions that undermine long-term retirement planning.

It also raises concerns for estate planning. If a deceased partner’s superannuation is transferred to the surviving spouse, their combined balance could exceed the $3 million threshold, potentially triggering additional tax on future earnings. Importantly, Division 296 applies to the net increase in the value of a member’s total superannuation balance. This includes unrealised gains, income such as dividends and interest, and even mandatory withdrawals, which are added back when calculating the tax.

No adjustment is made for inflation. For members still in the accumulation phase, or those with balances above the transfer balance cap, this tax applies in addition to the existing 15 percent tax on annual super fund earnings. This creates an effective double layer of taxation.

Lack of indexation especially worrying

Another serious issue is the lack of indexation in the proposal. This would mean that, over time due to inflation and wage growth, a large proportion of Australians may find themselves affected.

AMP Deputy Chief Economist Diana Mousina’s analysis has succinctly highlighted this problem. According to her calculations, based on today’s figures, a 22-year-old entering the workforce, earning an average full-time income and receiving standard super contributions, could find their super balance easily exceeds the $3 million threshold by retirement under current super settings.

This directly challenges the notion that Division 296 will only affect the wealthy. Without indexation, younger Australians who aren’t actively seeking to increase their superannuation but are just making standard contributions may be disproportionately impacted. It means an average worker today could fall under the tax in future without ever meeting most people’s understanding of what it means to be wealthy.

Treasurer Jim Chalmers has acknowledged that the $3 million threshold is not indexed and stated that “governments of either, if not both political persuasions at some point in the future will change the threshold.” However, leaving indexation to an undefined future decision adds uncertainty and undermines confidence in long-term planning. If change is anticipated, it should be built in from the beginning.

Redefining unfairness

There is also the issue of double tax exposure without integration where Division 296 introduces a new and separate tax. Existing capital gains tax will still apply when an asset is eventually sold. This means that an investor may pay Division 296 tax on an unrealised gain one year, and then face full capital gains tax on the same asset when it is realised.

Although unrealised losses may generate a Division 296 tax credit, these credits are not refundable and cannot be used to offset capital gains tax under current legislation. The treatment of unused credits remains unclear, particularly in cases where asset values fall or the investor passes away. This creates complexity and a potential mismatch between tax paid and actual financial outcomes.

Existing precedent suggests that Division 296 tax credits may not transfer to a member’s estate, meaning tax already paid on unrealised gains could be lost upon death—while capital gains tax on those same assets may still be owed by the estate.

The proposed changes also raise significant concerns about fairness.

Defined benefit pensions are assessed using formulas rather than actual account balances. This means many public sector employees and politicians will not be affected, despite receiving generous retirement incomes.

This creates a two-tiered system. Many of those responsible for designing or implementing the policy may not be personally impacted, while the financial burden falls on others.

This disconnect between the decision makers and those affected by the proposed policy is difficult to ignore.

There is another, more fundamental, element to this change as well.

This demand for tax on profits that investors have not even received may lead to increased selling pressure as investors seek to fund the tax. This could contribute to greater market volatility, with detrimental impacts on all but the most savvy investors.

How you can take action

ASA is calling for a comprehensive review of the Australian tax system, not piecemeal changes.

We are advocating for the removal of the proposal to tax unrealised gains and the inclusion of indexation to ensure the fairness of any thresholds over time.

ASA is also focused on ensuring retail investors understand how the proposed changes could affect them and is collecting member stories and case studies to strengthen our advocacy and highlight real-world implications.

If you share our concerns, we encourage you to take action:

• Contact your local MP.
• Sign the Wilson Asset Management petition opposing the taxation of unrealised gains. Signing this petition is one way retail investors can demonstrate broad community concern and push for a more balanced approach to reform.

We do not dispute the need for taxation. However, introducing this measure without a holistic review of the broader tax system, and forcing people to act against their own retirement interests by taxing profits they have not actually received, goes beyond what most would consider fair.

ASA will continue to advocate for a fair, transparent, and consistent superannuation system that supports the retirement ambitions of all Australians.