What Are Unrealised Capital Gains?

There is an unrealised capital gain when an asset, such as shares or property in your super fund, increases in value, but you haven’t sold it yet. 

For example, if your super fund owns a property bought for $500,000 that’s now valued at $600,000, that $100,000 increase is an unrealised gain because you haven’t cashed in yet.

Right now, Australia only taxes capital gains when you sell the asset (a “realised” gain). However, the government’s Treasury Laws Amendment (Better Targeted Superannuation Concessions) Bill proposes taxing these unrealised gains for super balances over $3 million starting July 1 this year. 

It’s part of a plan to reduce tax concessions for high-net-worth individuals, but it’s got people talking.

Why is this Proposal Sparking Debate?

This isn’t just a tweak to super rules; it could be considered a big shift in how Australia taxes wealth. 

The idea of taxing gains you haven’t pocketed yet is unusual, and it’s stirred up plenty of debate.

Here’s why it’s considered controversial:

1. It’s Meant to Be a Retirement System:
   
   Superannuation is designed to help Aussies save for retirement, with tax breaks to encourage long-term investing.
   
   Taxing unrealised gains could feel like the government dipping into your savings before you’ve even retired, which has left some feeling uneasy.
   
   
2. It Targets High Balances (But Could Grow):
   
   The tax applies to super balances over $3 million, affecting about 80,000 Australians initially, according to Treasury estimates.
   
   But here’s the catch: the $3 million threshold won’t be adjusted for inflation, so more people could be impacted over time as asset values rise.
   
   Financial Services Council (FSC) predicts this could hit 500,000 accounts in the future.
   
   
3. It’s a Departure from Tradition:
   
   Australia’s tax system has taxed capital gains only when they’re realised for nearly 40 years.
   
   Taxing unrealised gains is rare globally, only a few countries do it in specific cases such as Norway and Switzerland.
   
   Critics argue it sets a risky precedent for taxing other assets (e.g., home or business).

What Could This Mean for Your Super?

Wondering how might this proposed tax affect you, your business, or your retirement plans? 

Let’s look at the potential impacts, especially for those with self-managed super funds (SMSFs) or high balances:

• Cash Flow Challenges:
  
  If your super fund has to pay tax on unrealised gains, you might need to find cash to cover the bill without selling assets.
  
  For SMSFs holding illiquid assets (or assets that you can’t easily convert to cash), say, a property, this could mean selling other investments, disrupting your long-term strategy.
  
  
• Investment Strategy Shifts:
  
  Experts warn that investors might move away from volatile assets, including shares or start-ups, to safer, cash-based options to avoid tax on paper gains.
  
  This could limit growth in your super and hurt sectors such as venture capital, which relies on SMSF investments given that approximately 25% of venture capital funding comes from SMSFs according to Tech Council of Australia.
  
  
• Administrative Challenges:
  
  Calculating and reporting unrealised gains isn’t straightforward, especially for SMSFs.
  
  Trustees might face higher costs for valuations and compliance, adding complexity to managing your super.
  
  
• Retirement Planning Uncertainty:
  
  Super is meant to be a stable, long-term system.
  
  Changing the rules mid-game, especially with no inflation indexation, could erode confidence.
  
  Some worry high-net-worth individuals might shift money out of super into trusts or offshore accounts, weakening the system for everyone.

What are People Worried About?

Farmers, small business owners, and SMSF trustees with property or private assets could be hit hard.

For instance, a farmer with a $4 million property in their SMSF might owe tax on a $1 million paper gain without the cash to pay it, forcing a sale.

Taxing volatile, illiquid assets, like start-ups, could also discourage SMSF investment in Australia’s entrepreneurial ecosystem. 

What Can You Do Now?

The bill isn’t a law yet, but it’s wise to stay proactive. 

Here are some steps you can consider:

1. Review Your Super Balance:
   
   Check if your super is approaching or exceeding $3 million.
   
   If so, talk to an expert about strategies to manage potential tax exposure.
   
   
2. Consult an Accountant:
   
   For SMSF trustees, get advice on asset valuations and compliance to prepare for possible changes by July 1.
   
   
3. Explore Insurance Options:
   
   Get in touch with an insurance broker to discuss policies that can protect your wealth and business from financial shocks tied to tax changes.
   
   
4. Stay Informed:
   
   Follow updates on the bill’s progress in the Senate. 

Keeping Your Financial Future on Track

The proposed tax on unrealised capital gains in Australian superannuation is a big deal.

It could change how you save for retirement, invest, and plan for your family’s future.

While it targets high balances now, its lack of inflation indexation means more Aussies could feel the pinch later.

As your partner, our team at Tank Insurance is here to support you in navigating these changes, whether it’s protecting your wealth or planning for the unexpected.

Got questions about how this might affect you or your business and how this ties to insurance? Reach out to us now for a chat.

If you’re curious about other things, you can also read our blog.

Work with us in protecting your finances!