11 June 2025
The proposed tax on unrealized gains on superannuation accounts above $3 million.
Labor’s intention is to levy capital gains tax on the unrealized gain on that portion of an individual person’s superannuation balance which exceeds $3 million.
While $3 million seems a significant amount I know many people including successful dentists, medical specialists and owners of substantial veterinary practices with superannuation balances exceeding that amount. Many people, a long way off retirement, are going to eventually fall into the net due to the $3 million threshold not being indexed to inflation.
Assuming that the proposed legislation is resubmitted by Labor in its current form the policy highlights the substantial advantage of couples adopting contribution strategies where each have similar balances by retirement. Whereas an individual with, say, $5 million in their name but only $1 million in their spouse’s name will have $2 million falling into the net of this new tax, had they had $3million each they would be unaffected.
For those about to be affected remember that assuming that the new tax operates from 1 July 2025, it will only be measured and applied retrospectively if a member’s balance exceeds $3 million by 30 June 2026 so members in retirement mode will have one year to adjust their superannuation balances. Depending on age some members will be able to withdraw their balance above $3 million and recontribute a permitted amount in their spouse’s name. Check with your super fund provider to see whether you fit into this scenario. Obviously once reduced to $3 million superannuation balance for each individual they will need to monitor their balance year by year in order to control their situation.
If legislation is not passed until part way into the next financial year the government will need to decide whether to backdate it to the beginning of the 2026 financial year or have it start from 1 July 2026 in which case the first date of measurement will become 30 June 2027. As the government took the policy to the election it is likely to backdate legislation to be effective from 1 July 2025.
Additional adjustments.
Persons affected with SMSFs will also review all stocks capital gains status prior to the end of each financial year with a view to:
1. Selectively selling some stocks with embedded capital gains if they can be matched by simultaneously realizing matching losses preferably before 30 June this year and transferring the resultant cash out of their fund taking care to attribute the withdrawals against a member account in excess of $3 million. To the extent possible matching sales at profit with sales at loss, superannuation advisers, accountants and administrators are going to need to be far more involved to ensure that clients impacted will have timely effective advice prior to 30 June each year, in sufficient time, to take necessary corrective actions and minimize the impact of the coming new tax on unrealized capital gains. Advisers/accountants derelict in this duty whose clients are unnecessarily taxed may be subject to complaint and requests for compensation.
2. It is likely that some individuals will vary the proportion of interest paying assets and reduce the holding of market linked assets. Those with property in their funds have harder choices. In the past I advised very few clients to buy practice premises or other properties inside SMSFs for reasons arising from the concessions related to certain active business assets arising from the capital gains tax changes following the Ralph Review of 2000 but there were particular exceptional circumstances where I did advise it.
3. Those in retirement mode, able to make withdrawals, will consider carefully whether they would pay less tax overall if they withdrew their superannuation balances above $3 million and:
a. Invest in growth assets in their own/their spouse’s names, particularly as their effective marginal capital gains tax rate tax rate will be a maximum of 23.5% which is less than 30 percent for assets owned personally for longer than one year. Again, once this new superannuation impost is legislated this will be a further consideration prior to 30 June each year. Advisers and accountants must be alert if their clients are not going to be paying unnecessary amounts of tax. Simply completing a set of financials months into the next financial year and calculating the tax payable may cost their clients significant amounts and will expose accountants and advisers to serious complaint for lack of timely advice. and/or
b. Many couples with large superannuation balances who meet a condition of release are likely to reduce their superannuation balance and assist payment of children’s home mortgages. Where possible, effective tax planning is best achieved on an overall family basis.
A superannuation unrealized capital gains tax scenario.
Alice and Jack are drawing superannuation pensions with both aged in their sixties. Their superannuation fund has $10 million of assets being approximately $5 million each. Their fund is invested in a mixture of direct shares, exchange traded funds, including a couple of international ones, bank hybrid shares, other interest-bearing securities and a working cash management account. Currently there are about $3.4 million of unrealized capital gains since successful investments have been long held rather than cashed in. Alice and Jack each have a pension account of about $1.9 million which is tax free under current legislation and an accumulation account of about $3.1 million which is taxed at concessional rates.
They each have $2million of assets surplus to the $3 million threshold for the proposed new tax on unrealized capital gains. Hypothetically if net growth in assets is 10 percent in the year measured to 30 June 2026 or $500,000 each then 2/5ths of this will be subject to capital gains tax at 30 percent i.e. 30% of 2/5 of $500,000 which would be $60,000 each.
This tax can be repeated on the same assets.
This tax is not one off. Should the value of assets fluctuate, rising significantly in some years and falling substantially in others then the tax may apply to the same assets on multiple occasions because it is based on increases in value in any year beginning on 1 July regardless as to falls in value in intervening years. This application of capital gains tax is unprecedented and is additional to other taxes which may apply.
Alice and Jacks possible alternatives.
They own their home outright and have some investment assets in their own name currently providing them with about $20,000 of taxable income each which with the $18,200 of tax-free threshold each resulting in a tiny amount of taxable income. In practice they have gifted enough in charitable donations to eliminate personal income tax payments. Capital gains tax content is minimal since they have been cautious before selling directly owned shares with significant gain, choosing to realize a modest amount of capital gains tax per annum and ensure that the assets sold have been owned for 12 months in order to reduce the amount of capital gain which is added to their taxable income. In future they will be more attentive to the desirability of personally cashing some capital gains to use up their 50% discount provided that their taxable income remains below the 32.5 percent tax threshold plus 2 percent Medicare Levy which applies below $120, 000 of taxable income. With the 12month CGT discount their effective marginal capital gains tax rate on realized gains will be 17.25% (i.e. 50 % of <32.5% +2%>). If their respective taxable incomes fall below $45,000 each their effective capital gains tax rate will be 10.5% on assets sold beyond 12 months.
If they intend to maintain a substantial investment portfolio long term it will be tactically sensible to realize a modest amount of capital gain year by year rather than store it all up into a very large amount to be realized at one future date, inevitably at a higher effective tax rate. This also impacts estate planning. It will also influence their choice of personally owned investment assets.
They now consider whether they will be better off withdrawing the amount of superannuation in excess of $3million each and;
1. Directly investing it in their own names; or
2. Gifting a substantial amount to their adult children to pay down mortgages and/or paying education expenses for their grand-children; and/or
3. Gifting greater amounts to chosen charities. And/or
4. Carrying out further renovations on their home. And/or
5. Upgrading travel plans.
A factor in their decisions will be personal income tax rates and the fact that capital gains tax for assets owned in their own names only applies to realized gains (as distinct from taxing unrealized gains inside superannuation for amounts above $3 million). Personal income tax rates apply as follows;
On income below $18,200 nil,
On income above $18,200 but below $45,000 19 percent,
On income above $45,000 but below $120,000 32.5 percent.
Medicare levy of 2 percent is added.
The effective rates of capital gains tax on private sales after capital gains tax one year discount.
As capital gains tax is only applied on 50 percent of realized gains the effective tax on realized gains if they can be held below the 32.5 % threshold plus Medicare levy is 17.25 percent which is well below Labor’s intended tax rate applied to unrealized gains on assets outside of the $3 million cap inside superannuation providing that net personal taxable income is below $120,000.
Alice and Jack are likely to decide to reduce the amount of assets held in their superannuation fund such that their individual balances fall below $3million by 30 June 2026.
Dependent on the form that they choose to invest part of the assets in their personal name they can bias investments toward capital growth rather than income producing assets. Some ETFs such as the S&P 500 ETF (code IVV) produce low dividends and are more of an investment seeking long term capital gains.
Choice of assets to be sold and removed from superannuation.
In Alice and Jacks case they will find that removing cash, selling assets with offsetting losses and matching with realizable capital gains as well as transferring bank hybrid investments out of their fund will be preferable to realizing substantial taxable capital gains in their fund at this stage of their restructure. If they can reduce their respective superannuation benefits below $3million each without triggering substantial net capital gain they will be on firm ground.
Their respective accounts may then consist of those shares and ETFs with significant unrealized capital gains but as their pension accounts make up $1.9 million each their accumulation accounts are reduced to $1.1 million. Capital gains tax will not apply to the proportion of assets represented by their pension account and the tax rate applied to the proportion in their accumulation accounts is only 10 percent on assets owned for at least 12 months. This reduces their effective capital gains tax rate overall to 3.67 percent within the fund. Hence it is clearly advantageous to first reduce the fund by removing cash, realizing offsetting gains and losses and transferring out interest bearing securities leaving the residual $3 million containing the greatest embedded capital gain.
Election wins and losses.
In 2020 the New Zealand National Party government with a meagre 26 percent of the vote was put to the sword by Jacinta Adern’s Labor Party with 50 percent. Three years later unpopular Labor was booted from office by a revitalized New Zealand National Party. The turnabout demonstrated the volatility of politics. In Britain a massive victory by Labor led by Sir Keith Starmer has been followed soon after by voters demonstrating mass dissatisfaction, evidenced by the huge rejection of Labor in recent national local government elections. Governments with large majorities risk generating internal dissent against their ministries from their backbenchers.
On first being elected to parliament the young Winston Churchill was shown his seating in the House of Commons and advised that his political enemies would be sitting around him. The seats on the other side of the parliament were occupied by the opposition.
The Australian election resulting in a big majority for the Albanese Government and a disastrous result for the Liberal Party. The smaller Coalition partner, the National Party, held its number of seats. Labor achieved an historic majority but as the above examples demonstrate it would be wise to proceed cautiously not anticipating an easy repeat in three years. In 1970 British Labor Prime Minister Harold Wilson was well ahead in the polls one week before the election and lost. He lamented that “a week is a long time in politics”.
If Labor wishes to repeat its result in three years it needs to remember three rules of the political art.
1. Governments succeed by adopting their oppositions best policies. In the case of Labor Governments this means moving toward the right as did the successful Hawke Government which won a succession of victories. In the case of Coalition Governments this means moving from the right toward the center as did Malcolm Frasers government which achieved three election victories while its most ardent supporters complained that it was slow in implementing change.
2. It is best to do fewer things and do them well rather than generate lots of change. Every time a government makes a decision it upsets someone. Others have to pay when governments reward sectional interests. In 1972 Gough Whitlam’s Labor were swept to victory against a tired Coalition Government led by an inept Billy McMahon. It quickly, too quickly, introduced a multitude of changes and lost the support of a majority of the Australian people. It was swept from office in 1975 by a huge margin. When the Hawke/Keating Labor government replaced the Fraser Government it went to considerable lengths to distance itself from association with the experience of the Whitlam Labor Government by having a more orderly agenda.
3. Oppositions don’t win elections so much as governments become unpopular and lose them as did the Morrison Government.
Treasurer Chalmers would be wise to initiate a review of government spending with a view to reducing its projected deficits and debt as did the newly elected Hawke and Howard Governments. This would involve deferring the implementation of some of its promises and scaling back others. To become a long-term government, like that of Hawke/Keating or Howard/Costello, it must be seen to be fiscally responsible.
Will the Coalition assist Labor to sideline the Greens in the Senate? What could be the trade off?
Labor has an overwhelming majority in the lower house but lacks a majority in the Senate. There may be common ground in the Coalition negotiating with Labor to sideline the Greens in the Senate by the Coalition agreeing to support a range of Labor’s legislation thereby depriving the Greens of relevance. They both loathe the Greens. A trade-off might include the indexing of impacted superannuation balances and taxing only realized gains. The Teals are confined to a minority position in the lower house and have near zero influence.
Debt, deficits and credit ratings.
Throughout history governments have been destroyed by having too much debt. The natural inclination of politicians is to advocate for more spending on favorite causes. This afflicts governments with large numbers of backbench members advocating greater spending on causes nearest to their hearts. Too much debt leads to reduced credit ratings and greater interest payments.
The Ukraine War. Is Russia destroying its own economy to save President Putin’s Face?
With the price of crude oil falling to around $60 US a barrel on world markets, as Saudi Arabia increases production to offset its own falling income, Russia’s heavily restricted oil export market is now producing less export income than earned prior to its invasion of Ukraine. Russian oil sold covertly, using its shadow fleet of tankers, reportedly sells at a discount of approximately $15 US per barrel.
Russian military spending has forced up its official interest rate to 21 percent, consumer goods are in short supply and Ukraine is emboldened to fight on given the recent surge in support from European nations led by the UK and France. Western sanctions continue. The Scandinavian countries Norway, Denmark, Sweden and Finland are moving in consort to re-arm as a defensive measure against Russia. Russia is no longer making significant gains in battle. Its casualties are rising with some sources estimating the wars dead and wounded total approaching one million. The war is causing huge pain in Russia with negligible gain. Cheap Ukrainian drone attacks do some damage and demonstrate to the Russian public, including in Moscow, that Ukraine remains in the fight. In the face of European NATO nations strengthening their defense spending and continuing assistance to Ukraine, US President Trump has been persuaded by the British Prime Minister and French President to adopt a tougher stance on Russia. Vladimir Putin’s options are looking bleaker over three years since he announced a “special operation” expecting a quick Ukraine surrender. Russia is using every possible negotiating trick but it’s hoped for easy strategic victory appears as elusive as ever.
The recent drone attacks on Russian aircraft located on remote airfields demonstrated that Ukraine is capable of surprises. The rapid adaption of drones has broken up front lines with troops widely dispersed and well camouflaged. Drones have multiple uses and drone technology is advancing in leaps and bounds. It appears that Ukraine is leading the evolution of inexpensive drone technology. The European members of NATO have lifted their support of Ukraine.
Lessons from History.
History records that World War One caused the supporting German economy into near collapse by late 1917. The surrender of Bolshevik Russia enabled the German Army to muster its remaining strength for one last major offensive on the Western Front in early 1918 which failed. Troubles broke out in Germany and military attempts to take over control of the economy including munitions production failed. German generals Hindenburg and Ludendorff then advised the Kaiser that an armistice must be negotiated. The German Navy’s sailors mutinied, refusing to sail to a final battle against the British fleet, sparking a popular revolt which forced the Kaiser’s abdication. The new civilian government agreed to an armistice which in reality was a surrender. The German fleet was interned in Scapa Flow where it scuttled itself and Germany was stripped economically to pay reparations at the Treaty of Versailles. Historians argue that the seeds of World War Two were sewn at Versailles.
As failure to achieve easy victory confronts Vladimir Putin’s Russia its options are narrowing. It is unlikely to receive much support from China which is confronting its own economic problems.
Retirement of Warren Buffett.
Legendary investor Warren Buffett, the leader of Berkshire Hathaway has announced his forthcoming retirement by years end. He bought the then a floundering textile company 60 years ago, and invited a circle of friendly investors to buy shares in it as he turned it into a long-term investment powerhouse. The textile part of the business died a long time ago but last year the company earned $47.4Billion operating earnings. It has not paid a dividend since 1967, preferring to reinvest its after tax earnings and be a long-term investor in its assets. Buffett has long reasoned that by doing so he earns a return on unrealized capital gains part of which would be diminished if he paid dividends and tax on disposal of assets. If shareholders want cash they can sell some of their shares in the company.
Most of Berkshires assets are unlisted so don’t believe financial advisers who purport to be ‘advising like Buffett’. An unlisted Berkshire subsidiary Burlington North Santa Fe Railroad (BNSF)owns a vast amount of railroad track and other unlisted subsidiaries own massive insurance businesses.
Other newsletters and dental articles can be found at grahammiddleton.com.au
Best wishes to all.
Graham Middleton
grahamgeorgemiddleton@gmail.com
