Changes to SMSF’s with total balances exceeding $3M are imminent. Are your clients ready for an additional 15% tax?
If legislated, starting 1 July 2025, a new Division 296 tax will apply to SMSF members whose total super balances (TSB) exceed $3 million at financial year-end. It will impose:
- A 15% additional tax on the growth in super balances over $3 million.
- Crucially, “growth” includes both realised and unrealised earnings, capital gains on properties that haven’t been sold will still be taxed
This framework is a “soft cap”, you’re not forced to withdraw funds, but earnings above $3 million are now taxed at 30%, double the standard 15% rate.
Why commercial property SMSFs are especially affected.
- Highly concentrated & illiquid assets: SMSFs heavily invested in direct property, particularly commercial properties often face sharp valuation gains. At the end of 2022, property made up about 10.3% of SMSF assets ($88 billion of $846 billion total)
- Unrealised gains count: Even without selling, rising valuations of commercial property can trigger the Division 296 tax. Previous soft-cap settings didn’t tax these paper gains.
- Cash-poor nature of property SMSFs: Many SMSF trustees holding real estate are asset-rich but liquid-cash poor, farmers and small business owners especially. Paying a 30% tax bill on paper gains could force property sales to raise cash.
- Industry bodies warn this could lead to “panic selling” of commercial assets ahead of the cap rollout. I personally have my doubts.
Broader financial and market implications
- SMSF sector ripple effects: Weighted shifts away from high-growth assets could reduce capital for startups, SMEs, agricultural enterprises, and other beneficiaries.
- Structural shift in investment: Financial advisors predict a pivot towards cash-flow positive assets (like leased commercial properties) instead of capital-growth-heavy strategies.
- Succession planning complexity: The tax could diminish SMSFs as a vehicle for intergenerational wealth transfer, prompting families to explore trusts, private businesses, or non-super investment avenues.
Who’ll be affected, and how to manage
- Only around 80,000 SMSF members currently exceed $3 million, but this number could grow to 500,000 over time unless indexation is introduced.
- Farmers and business owners using property to fund retirement are most vulnerable due to valuation volatility and low liquidity.
Strategic responses being recommended by tax experts:
| STRATEGY | HOW IT HELPS |
| Delay recognition of paper gains | Selling/loss harvesting before 30 June may reduce sudden spikes |
| Reallocate growth assets | Shift towards income-generating or liquid investments |
| Use alternative structures | Consider non-super vehicles (e.g., trusts) |
| Draw down to stay under cap | Withdrawing pension balances to stay below $3 million |
Risks & concerns
- Unrealised gains tax is unique and controversial, most tax systems do not tax on paper gains.
- Lack of indexation means inflation or rising markets will push more people in over time.
- Economic distortion: Warnings that the tax may hamper venture funding, small businesses, farm viability, and diversity of SMSF investment
- Market timing panic: Evidence of immediate asset sales suggests policy’s implementation may have unintended consequences
The $3 million SMSF cap, via Division 296, marks a significant policy shift, potentially structural for SMSF commercial property strategies. Trustees must turn their attention now to:
- Conducting balance and asset reviews
- Consulting financial experts to model liquidity and tax exposure
- Ready alternative structures or asset pathways outside SMSF
Proactive planning is key.