Super cap tax creates a danger zone for one cohort of investors

As debate rages around the proposed new $3 million super cap tax, investors and their advisers are already considering the implications for capital gains versus income and the new risk of illiquidity. In our view, these implications mean that some of those impacted should be dramatically re-thinking their investment strategy.

Betashares is not a tax adviser. This article should not be construed or relied on as tax advice and investors should obtain professional, independent tax advice before making an investment decision.

The background and controversy

In 2023, the Albanese government proposed a Division 296 tax (“Div 296”) – a plan to impose an additional 15% tax on the earnings of super balances above $3 million, with a proposed start date as early as July 2025¹.

The bill passed the House of Representatives in October 2024, but has not yet passed the Senate. Following the recent federal election however, it appears that the Labor government is likely to secure sufficient votes in the Senate, with the support of the Greens, to pass the legislation. However, debate continues on some of the more contentious aspects of Div 296.

Most would agree with the general principle of making the super system more equitable, but two parts of the legislation are particularly contentious:

1. No indexation applied to the $3 million cap

While it’s been pitched as a tax that will initially only affect the top 0.5 per cent of the population by wealth – or about 80,000 people – the government has so far refused to index the $3 million threshold². Over time, the result is that it will inevitably capture a larger proportion of the population. Some estimates have at least half of Gen Z hitting the $3 million mark by the time they near retirement.

2. Taxing unrealised capital gains

The additional 15% tax on “earnings” is applied not just on income and realised capital gains, but also unrealised capital gains. This goes against one of the foundational tax principles, which is to allow for the taxpayer to meet their tax liability from cashflows generated from their investments.

Many self-managed super funds (“SMSF”) own illiquid assets, such as farmers or small business owners who own their farms or business premises through their SMSF, and a tax on unrealised gains may be difficult for them to pay without liquidating these assets.

It also has material implications for asset allocation, as the reduced tax advantage of capital gains over income and the unpredictability of unrealised capital gains can make income focused assets more attractive assets for an individual captured by Div 296.

Consider that discounting long term capital gains in accumulation phase (ie, before retirement) normally reduces the tax rate from 15% (for income) to only 10%. However, for the portion of an individual’s balance in excess of $3 million, Div 296 could mean long term capital gains face a total tax rate of 25%, versus 30% for income.

What can Super members do?

The first thing to note is, Div 296 still needs to get through the Senate and may change from its current form, but below are some potential strategies if it does come into force as expected from 1 July 2025.

If you are younger than preservation age (generally 60), you will generally not be able to withdraw money from super. For members in this cohort with balances above or near $3 million, the question becomes – what can I do within super to protect against some of the more dire outcomes of this new tax. One option that could be available for some SMSFs is super splitting, if one spouse has a balance below $3 million. Beyond this strategy, what can a member do within super?

Building SMSF portfolios so you can handle unpredictable tax bills

For investors with large illiquid assets, like property or a stake in a small business, the potential for unrealised gains creating a cash flow issue cannot be understated. Two strategies for funding potentially unpredictable, significant tax liabilities where its sub optimal or even not possible to sell such assets are:

1. Seek investments that can consistently generate a higher level of income, ideally with franking credits attached.

Those franking credits can be offset against tax liabilities including Div 296, and the cash income can help fund what remaining tax obligation may exist. Ideally an investor can avoid being forced to sell down assets entirely to fund a Div 296 tax bill.

Implementation Idea: HVST Australian Dividend Harvester Active ETF provides broad exposure to Australian equities, and over the last twelve months has provided a cash distribution yield of 6% over the last twelve months versus 4% for the ASX200 dividend yield³. On top of the additional cash income, HVST provided investors with nearly twice the franking credits of ASX 200.⁴

2. Ensure you have other assets in an SMSF that are highly liquid

One of the requirements of running an SMSF is to satisfy that the investment strategy adequately caters for the liquid requirements of that SMSF, for example to cover ongoing fees, costs and tax. The implications Div 296 for large SMSF balances is that the need for liquidity will increase materially. Ideally the liquid assets would also provide a high degree of capital stability, such that the SMSF trustee is not forced to sell at distressed prices.

SMSFs typically hold a higher allocation to cash and term deposits (on average 17% of SMSF assets sit in these investments⁵). While a transactional bank account will provide ready liquidity, the interest rates are often underwhelming. Term deposit interest rates are generally higher, but if an investor needs to get out early, they will usually face some sort of penalty or break fee.

Implementation Idea: Betashares Defined Income ETFs aim to pay out a set monthly dollar distribution amount and hold a diversified portfolio of high-quality, investment grade Australian bonds that is held to maturity. Investor capital is returned at maturity of the ETF, but critically the investor can sell on market without any penalties⁶. 28BB 2028 Fixed Term Corporate Bond Active ETF matures in 2028, 29BB 2029 Fixed Term Corporate Bond Active ETF matures in 2029 and 30BB 2030 Fixed Term Corporate Bond Active ETF matures in 2030. An investor can choose between these ETFs based on their desired yield and investment time frame, with the comfort of knowing they have access to their money prior to the maturity date by simply selling on the ASX.

Div 296 danger zone – the approach to retirement

Once a Super member has reached preservation age and can access their super, there are several options they can take to reduce their balance below $3 million. But for one cohort of super members the introduction of Div 296 has some very negative potential consequences. That cohort is individuals approaching their retirement.

Members of funds that experience significant increases in asset values will pay Div 296 tax as the assets rise. If instead the assets fall in value that member will have a ‘negative earnings’ amount for Div 296 that can be carried forward and offset against future earnings for this tax⁷.

But timing matters here. In early accumulation there is a fair chance that those Div 296 ‘negative earnings’ may be used, but what of those members whose balance falls below $3 million before fully using their losses.

Take the simplified example of a member with a $4 million balance who is expecting to retire in a year’s time and withdraw at least $1 million from super to bring themselves below the cap. What will different potential portfolios return scenarios mean for their after-tax outcomes? If there was a binary 50/50 chance of a 10% portfolio gain or loss, then their expected after-tax outcome is negative. If that binary portfolio gain or loss was increased to +/- 20%, then the expected after-tax outcome becomes even more negative⁸. In other words, the greater the portfolio volatility, the worse off the investor is in this specific scenario.

The outcomes are even more egregious for a member approaching retirement who first makes a large paper gain one year, followed by a large paper loss the following year.

Key takeaways:

1. The sequencing of returns becomes even more consequential as a member approaches retirement if they are captured by Div 296; and
2. That member may be significantly better off by reducing the volatility of their portfolio at this critical juncture.

Div 296 merits consideration of an adjustment to the traditional glide path asset allocation. A glide path approach refers to a specific strategy for gradually adjusting your investment portfolio over time, namely reducing your allocation to growth assets and increasing your allocation to defensive assets as you age.

An alternative to reallocating from growth assets like equities to defensive assets like bonds and cash is simply to seek equity investments that have lower volatility or incorporate risk control and shift the return mix from capital to income.

Implementation Ideas: AUST Managed Risk Australian Shares Complex ETF and WRLD Managed Risk Global Shares Complex ETF are designed to provide broad diversified exposure to Australian and global shares, respectively, with a risk management strategy to decrease portfolio volatility, regardless of market conditions. These ETFs may not necessarily be appropriate for a young investor with a long investment time horizon seeking to maximise their exposure to the share market, but given the implications of Div 296, they may have a strong use case for certain SMSF investors seeking to manage volatility risk as they approach retirement.

Betashares Yield Maximiser ETFs are another option. These ETFs implement a covered call investment strategy – as well as earning dividends they generate additional income by selling call options over the portfolio of shares they hold. This additional income seeks to buffer the ETF’s returns in down markets, while the covered call means they do not fully participate in all the upside in a strong bull market^[9]. The likely net outcome is:

1. Higher income, that can be used to help fund Div 296 tax liabilities; and
2. Lower volatility, which can reduce the risk around timing of gains and losses, and therefore asymmetric Div 296 tax outcomes as a member approaches retirement.

YMAX Australian Top 20 Equities Yield Maximiser Complex ETF  provides exposure to a portfolio of the 20 largest blue-chip shares listed on the ASX with a covered call strategy which has boosted the gross distribution yield to 9.3% p.a. for the 12 months to 30 April 2025.¹

For investors looking for US equity exposure with less volatility and higher income, UMAX S&P 500 Yield Maximiser Complex ETF has a historical yield of 5.3% p.a. for the 12 months to 30 April, compared to ~1.2% p.a. for the S&P 500 Index itself. ¹

Conclusion

Div 296 presents a new set of challenges for super investors to navigate. While the legislation is yet to pass through the Senate, it pays to be prepared. In this note we present the case for a number of ETFs that provide potential flexibility and/or improve outcomes for investors impacted by this new tax. For more information on these ETFs, please click on the fund cards at the bottom of this piece.

Disclaimer:This information is general only, is not personal financial advice, and is not a recommendation to invest in any financial product or to adopt any particular investment strategy. You should make your own assessment of the suitability of this information. It does not take into account any person’s financial objectives, situation or needs. Past performance is not indicative of future performance.Future results are inherently uncertain. This information may include opinions, views, estimates and other forward-looking statements which are, by their very nature, subject to various risks and uncertainties. Actual events or results may differ materially, positively or negatively, from those reflected or contemplated in such forward-looking statements. To the extent permitted by law Betashares accepts no liability for any loss from reliance on this information.There are risks associated with an investment in the Funds, including interest rate risk, credit risk and market risk. Investment value can go up and down. An investment in the Funds should only be considered as a part of a broader portfolio, taking into account your particular circumstances, including your tolerance for risk. For more information on risks and other features of the Funds, please see the Product Disclosure Statement and Target Market Determination, both available at betashares.com.au.

References:

1. Superannuation (Better Targeted Superannuation Concesssions) Imposition Bill 2023 ↑

2. Ibid. ↑

3. As at 30 April 2025. The Fund’s yield will vary with market conditions, including the level of dividends paid by portfolio companies, market volatility and changes in the Fund’s capital value. Entitlement to franking credits advised at financial year end. Past performance is not indicative of future performance. ↑

4. Franking level is total franking level over the 12 months to 30 April 2025. Not all Australian investors will be able to receive the full value of franking credits. Yield will vary and may be lower at time of investment. ↑

5. Source: ATO SMSF quarterly statistical report as at March 2025 ↑

6. Excluding any applicable transaction fees and costs. The target distribution for the Funds may vary in certain circumstances. Please refer to the PDS for each Fund. ↑

7. Superannuation (Better Targeted Superannuation Concesssions) Imposition Bill 2023↑

8. Consider the expected return on the $1 million portion above the Super cap, after the application of the 15% Div 296 tax. If the portfolio appreciates by 10% that gain, net of Div 296, is $85,000. However, if the portfolio falls by 10% and the member is never able to use that loss to offset against future gains, the net dollar loss is -$100,000. If the probability of both outcomes is 50%, then the expected return is a loss of -$7,500. Following this logic if the binary portfolio gain or loss is increased to +20% or -20%, then the expected return on the $1 million, after applying Div 296, is -$15,000. ↑

9. https://www.betashares.com.au/files/factsheets/YMAX-Factsheet.pdf ↑