Proposed tax on retirement savings threatens Australian Super system

With the Australian Labour Party (ALP) swept back to office in the May general election, Australians are now facing a controversial new tax on superannuation savings.

A measure to tax unrealised capital gains was scheduled to take effect from July 1, but it has stalled in the Lower House, waiting to pass through the Senate.

Federal treasurer Jim Chalmers considers the bill his “unfinished business” and, buoyed by the unexpected public mandate to govern for another three years, he will now push to have the legislation passed.

Chalmers views the reform as a step towards creating a “fairer and more equitable” superannuation system.

But the proposal has set off alarm bells with critics, who have warned that the move could undermine retirement savings and set a dangerous policy precedent.

Currently, all super earnings are taxed at a flat rate of 15%, but under the proposed changes, the taxation on the earnings of individual accounts with balances above A$3m (€1.7m) will be doubled to 30%.

The burden falls largely on individual accounts held in vehicles known as self-managed superannuation funds (SMSFs), which collectively hold more than A$1trn, or a quarter of the nation’s retirement savings pool. As of March 2025, the Australian Taxation Office (ATO) recorded 625,000 SMSFs in Australia, with more than 1.1 million members.

Members of industry and large retail funds typically have much lower balances.

A senior tax expert with one of the largest industry funds told IPE that the impact on large funds lies in the requirement to provide more information to the ATO.

“We are required to report members’ total super balance to the ATO annually. The ATO then uses the data, along with information collected from the other super funds and SMSFs to aggregate the total balance of each individual taxpayer.”

He says those with balances of more than A$3m will be notified by the ATO of the tax to be paid on earnings above the threshold.

In its submission to the Treasury, AustralianSuper said that typically, superannuation funds already account for tax on an accrual basis, including both realised and unrealised capital gains.

“Members’ superannuation balances reflect crediting rates, which are determined daily. These are net of the tax superannuation funds currently pay on investment earnings,” it said.

“For example, if a large fund owned an infrastructure asset, and this increased in value, a proportionate amount of capital gains tax liability would be factored into the crediting rate. The fund would not wait for the asset to be sold and the CGT liability to crystallise before factoring the tax into the crediting rate. This is important to ensure that tax liability is borne equitably between members who join or leave the fund on different sides of the payment of tax to the ATO when the investment earnings are realised,” according to AustralianSuper.

Limited impact?

Prime minister Anthony Albanese has defended the new superannuation tax, noting that it “will affect 0.5% of the superannuation population”.

But critics argue the issue is not how many Australians will be affected or how much revenue it will raise – it is that the tax is not indexed to inflation, and more importantly, that it introduces taxation on unrealised capital gains.

The government estimates that in the first year, up to A$2.3bn (€1.3bn) can be raised by taxing unrealised and realised capital gains on individual superannuation accounts with balances exceeding A$3m. This figure is expected to rise to A$9.7bn over the next five years.

With projected growth in contributions and investment returns, total tax revenue could reach A$40bn over the medium term, according to Parliamentary Budget Office estimates.

Business leaders warn this could have far-reaching unintended consequences. They are particularly concerned that this tax will set a precedent that could in future extend into other areas, like real estate.

Among the most vocal critics is Geoff Wilson, founder of Wilson Asset Management (WAM). Wilson considers taxing unrealised gain “unprecedented and deeply flawed”. WAM, which manages A$5.8bn on behalf of 130,000, strongly opposes the proposal.

Wilson says the tax is “patently illogical and unfair”, because it taxes profit that may never materialise. “I have a client who has invested A$2m in a start-up business that is now valued – on paper – at A$30m. What is he supposed to do?”

The business community has echoed this concern, arguing that if an individual must pay tax on the unrealised gain of an investment, and if the value drops in subsequent years, the tax paid will not be refunded.

Wilson stresses the concern is not about taxing those who have more than A$3m but about the lack of indexation. “This will disadvantage all the young people in Australia.”

Modelling by Australia’s Financial Services Council suggests that, without indexation, more than 500,000 taxpayers could eventually breach the A$3m threshold. The current estimate is that the tax will affect 80,000 Australians.

Rather than raising extra revenues, Wilson believes the tax could alter behaviour and result in revenue losses to the system.

“This will disadvantage all the young people in Australia.”

Geoff Wilson, founder of Wilson Asset Management

His firm estimates that up to A$150bn could be withdrawn from the pension system and redirected into Australia’s already tight housing market.

“I have an elderly couple with A$9m in their super. When the tax comes in, they plan to withdraw A$6m to gift it to their children and grandchildren to buy real estate for their primary residences which are tax-free. So, instead of taxing the earnings on A$9m at 15%, the government will miss out on the tax from A$6m.”

Wilson cites Norway as a cautionary tale. “When Norway brought in a wealth tax on unrealised gains, the top 100 of the country’s richest 400 people left the country, taking half of the wealth (of this cohort) with them. It has been a disaster for Norway.”

Business leaders have voiced their concern about the drying up of capital for small to medium-sized businesses. Most start-ups rely for financial backing on SMSFs, which have been set up by financially savvy high-net-worth individuals, as these businesses are too small to attract investment from large super funds.

The government’s position is that the policy’s goal is to reduce, though not eliminate, the generous tax concessions afforded to wealthy superannuants. Treasury estimates these concessions cost around A$50bn annually, largely because earnings in super are taxed at just 15% in accumulation and are tax-free in retirement – well below the top marginal tax rate of 45%.

The government’s desire to recoup some of this revenue is understandable and even supported by some high-net-worth individuals.

In a discussion paper on better tax ideas for the 48th Parliament, Greg Jericho, chief economist at the left-leaning Australia Institute, says tax breaks now reduce income tax by around A$60bn a year, slightly less than the cost of old-age state pensions, which was estimated at A$61.6bn for the 2024-2025 period.

Jericho wrote that tax concessions cost the Australian state A$56bn in 2024-25 in foregone revenue, with A$20.3bn going to the top 10% of income earners. “The entire bottom half of income earnings, by contrast, receive 13%,” he noted.

This is the reason, he argues, why Parliament should pass the legislation to reduce the level of concessions offered to high-income individuals.