Labor’s Controversial Superannuation Tax Reform: What You Need to Know

Posted on 12 May 2025

The Australian Labor Party has announced a significant shift in the superannuation taxation landscape, proposing changes that have sparked debate across the financial and political spectrum. Central to the proposal is a new tax regime for individuals with large superannuation balances — and, for the first time, the inclusion of unrealised capital gains in the tax calculation.

The Proposed Changes at a Glance

From 1 July 2025, the Labor government plans to:

Double the tax rate on superannuation earnings above $3 million from 15% to 30%.
Apply this higher tax not only to realised gains (when assets are sold) but also to unrealised gains — increases in the value of assets that have not yet been sold.

The measure is expected to affect approximately 80,000 high-balance super accounts, generating an estimated $2 billion in additional tax revenue over four years. However, critics argue that the real cost may be far greater — especially for those with self-managed superannuation funds (SMSFs) and illiquid assets such as property.

What Are Unrealised Capital Gains — and Why Are They Controversial?

Unrealised capital gains refer to the increase in value of an asset that hasn’t been sold. Traditionally, Australia taxes capital gains only when they are realised — when the asset is sold and the profit is actually received.

Labor’s proposal would mark a departure from this long-standing principle, introducing a form of taxation that requires investors to pay tax on “paper profits.”

Example:
If a property held within your super fund increases in value by $500,000, you could be taxed on that increase — even if you haven’t sold the property or received any income from it.

This change is being labelled by critics as “taxation without liquidity”, meaning individuals may face significant tax liabilities without having any corresponding cash flow to cover them.

Impact on SMSFs and Illiquid Asset Holders

The proposal has raised particular concern among trustees of SMSFs, many of whom have invested in assets that are not easily sold or valued on a regular basis. Under the proposed rules, these investors may be forced to:

Pay tax on gains that are purely theoretical;
Sell assets prematurely to meet tax obligations;
Struggle with the administrative burden of annual valuations.

There’s also concern about what happens in a volatile market: if an asset gains value in one year and is taxed, but then loses value the next, the investor may end up paying tax on wealth that never truly existed.

A Flat 30% Tax Without CGT Discounts

Currently, capital gains within super funds are taxed at an effective rate of 10% if the asset is held for more than 12 months, thanks to a one-third CGT discount applied to the 15% super tax rate.

Under Labor’s plan:

The CGT discount will be removed for balances over $3 million.
All earnings — including capital gains, interest, dividends, and unrealised gains — will be taxed at a flat 30%.

This effectively triples the CGT burden on long-term investors holding assets in super.

The $3 Million Cap — Not Indexed for Inflation

Another contentious aspect is the lack of indexation on the $3 million threshold. While this figure might seem high today, it will lose value over time due to inflation. Without adjustments, more Australians will eventually cross the threshold — not because they are ultra-wealthy, but simply due to the natural growth of long-term investments.

Financial experts warn that younger Australians who are diligently saving now may be unfairly impacted decades later when they retire.

Concerns About Precedent and Policy Stability

Perhaps the greatest concern is the precedent this policy sets. Australia has historically offered a stable, rules-based superannuation system. By changing the rules midstream — and introducing taxation on unrealised gains — the government risks undermining confidence in the entire retirement savings framework.

There is widespread fear that:

Future governments could extend this approach to other asset classes or lower thresholds;
Superannuation may become a less attractive vehicle for long-term wealth creation;
Investors will seek to move assets out of the super system into less regulated structures, such as discretionary trusts or offshore accounts.

Supporters Say It’s About Fairness

The Labor government argues that the change is about fairness and sustainability. With a growing aging population and increased pressure on government finances, the idea is to ensure that very high-balance super accounts — often held by the wealthiest Australians — contribute more.

Treasurer Jim Chalmers has framed the reform as a modest adjustment affecting a small minority, while protecting the integrity of the broader system.

Final Thoughts

Labor’s superannuation tax proposal is one of the most significant — and controversial — changes to the system in years. While its impact is currently limited to those with balances over $3 million, its implications are far-reaching.

The inclusion of unrealised capital gains in the tax base challenges fundamental tax principles, raises questions about liquidity and valuation, and could have ripple effects on investment behaviour and trust in the system.

Whether the changes will ultimately pass Parliament in their current form remains to be seen, but one thing is clear: the debate over the future of superannuation taxation in Australia is far from over.