They’ll Tax You Before You Sell. The New Property Rule Shocking Australia [APS081]

A recent tax reform in Australia has gone viral overnight—sparking heated discussions nationwide. And for high-net-worth individuals and property investors, this might just be the most important tax policy shift in recent years. It could completely overturn the existing logic of real estate investment in Australia—and may well mark the starting point of a mass sell-off in investment properties. From July 1st this year, Australia will impose an additional 15% income tax on superannuation balances exceeding $3 million. But what’s truly shocking is this: even unrealised capital gains—that is, paper gains on assets that haven’t been sold—will also be taxed. Yes, you heard that right. Even if you haven’t sold your property, you’ll still be required to pay tax on its increase in value on paper. And if this sets a precedent, the next logical step might be to extend similar taxes to properties held in family trusts… or even those owned personally. If that happens, we can no longer call it a simple ‘tax reform.’ It would be nothing less than a total reset of the real estate investment logic that Australians have followed for decades.

In this episode, we’ll start from the core reasoning behind this tax reform. We’ll explore its potential impact across Australia’s wealth landscape—especially for those investing in property. More importantly, we’ll show you how to rethink and restructure your investment portfolio to reduce losses…And find an alternate path toward financial freedom, even as the rules of the game begin to shift.

Division 296

This tax measure is officially named Division 296. It's arguably the most significant reform to Australia's superannuation tax system in decades—perhaps the most consequential ever. Under this reform, any earnings derived from superannuation balances exceeding $3 million will attract an additional 15% tax, on top of existing taxes. That means, during the accumulation phase of super, where income was previously taxed at just 15%, some individuals will now face a tax rate of up to 30%. Naturally, the first question that comes to mind is this: If a company is only taxed at 25% or 30%, does it make more sense to invest through a company instead? Or, since family trusts can distribute income to either companies or individuals—possibly resulting in a lower combined tax rate—should investors switch to family trusts? And that's exactly why this change is so significant. It doesn't just affect superannuation—it disrupts the entire logic behind how Australians choose investment vehicles, what type of assets they hold, and in what proportions.

The most controversial aspect of Division 296 is the tax on unrealised capital gains. Yes—you heard that right. Even on paper gains, assets that haven't been sold yet, you'll be taxed an extra 15%. Here's the issue: what if your super fund—or SMSF—is heavily invested in property, and there's simply not enough cash on hand to pay the tax? Will you be forced to sell the property just to cover the tax bill? That's where the real trouble starts.

If your investments are in stocks, at least they're easier to liquidate. But property? You may have no choice but to sell, even at the wrong time—triggering potential panic selling. Even worse, some investors might sell now just to avoid future problems, moving their assets out of the super system altogether. This could send serious shockwaves through Australia's financial system. Let's be clear: taxing unrealised capital gains is unprecedented in Australia. So the big questions are: Will this reform really pass? When will it take effect? And how exactly will unrealised capital gains be calculated?

Legislative Process

This tax law had already passed the House of Representatives, but with the 2025 federal election approaching, it was paused and never made it through the Senate in time. Now, if the Liberal Party had won, they likely would have dropped the proposal altogether. But instead, Labor won the election in a landslide, gaining the most House seats since the Howard Government in 1996. The political landscape has changed.

And post-election, the Labor Government has repeatedly confirmed they will reintroduce the legislation. The Treasurer said: 'The Government's position has never changed. This reform will only impact super balances above $3 million. That's just 0.5% of account holders.' They've portrayed it as no big deal—almost suggesting the public is overreacting. But here's the kicker. A 25-year-old earning $80,000 a year could easily have more than $3 million in super by retirement. Why? 1. Compound growth from long-term investing. 2. The $3 million threshold isn't indexed for inflation. So, over time, more and more Australians—including ordinary people—will be caught in this tax net.

As of now, the Labor Government says the reform is set to take effect from July 1st, 2025. However, given the time required to pass legislation, update systems, and integrate software, it may be delayed. Still, the chance of it passing is very high. Labour holds a majority in the House. And in the Senate, Labor is the largest party. If they team up with the Greens, even if the Liberals oppose, the bill will pass. But there's a catch. The Greens always want something in return. And in this case, the Greens want to lower the threshold—from $3 million to $2 million.

If that change becomes reality, Australia's entire financial and investment landscape could shift dramatically. Let me give you an example.

How Division 296 Is Calculated

Division 296 calculates tax very differently from the current super system. It doesn't tax your taxable income. Instead, it's based on your Total Superannuation Balance (TSB). Calculating the TSB is no simple task. If you want to dive into the technical, the ATO website has all the details. But let me break it down in plain English.

It's done in three steps:

1. Take your super balance at the end of this financial year, subtract last year's balance, and adjust for contributions and withdrawals. This gives you the net earnings.

2. Then, divide the earnings into two parts: The portion attributable to the first $3 million. The portion above $3 million.

3. The extra 15% tax only applies to the earnings above $3 million.Let's say your super grows from $3 million to $3.2 million. That's a $200,000 gain. After adjusting for contributions and withdrawals, the net earnings stay at $200,000.Now: The portion attributable to the first $3 million is: $200,000 ÷ 3.2M x 3M = $187,500. The rest: $200,000 – $187,500 = $12,500. You'll pay 15% tax on that $12,500 = $1,875 extra tax for the year. And this happens every year. As your super balance grows, the taxable portion grows too.

But here comes the real headache: How do you value assets that haven't been sold? Who decides the market price? If the government does it, it could be biased—since they have an incentive to overvalue and collect more tax. You could use third-party valuers, but that adds complexity, cost, and room for disputes. The government has not yet provided clear guidance on how valuations—or related audits—will be handled.

All of this leads to the big issue: What does this mean for Australians' overall wealth planning? What happens to those who use SMSFs to buy residential property, banking on long-term capital growth and minimal tax? The very logic behind property investment, especially through self-managed super funds, may be facing a dramatic reset.

This reform isn't just a tax—it's a turning point for Australia's investment logic.

Impact on SMSFs

Over the past five years operating the VISION Membership program, we at AusPropertyStrategy have witnessed the steady growth of our members' wealth. In the last year or two, as some members faced borrowing limitations and began prioritising early retirement, we've helped more and more members set up SMSFs and use them to purchase investment properties—cases we now encounter almost every week.

Why do we use SMSFs instead of regular superannuation for property investment? There are three main reasons:

1. SMSFs allow direct purchase of individual properties.

2. SMSFs increase borrowing power, enabling leverage to accelerate returns.

3. Rental income and capital gains within a SMSF are taxed between 0% and 15%, which is significantly lower than rates for individuals, companies, or family trusts.

But here comes the big question: With the introduction of Division 296, is using a SMSF to invest in Australian residential property still a viable path?

To answer that, we need to look at several key aspects:

1. Using SMSFs as the Main Vehicle for Property Investment May No Longer Work. Many high-net-worth Australians who have studied property investment deeply were previously making large contributions into their SMSFs and using those funds—along with bank loans—to purchase multiple properties. The loans didn't affect their personal borrowing limits, and the tax rate was the lowest of all structures in Australia.

But with Division 296 now on the table, this strategy starts to fall apart.

The extra 15% tax itself isn't the dealbreaker—because even with that, SMSFs are still more tax-efficient than other entities. The real problem lies in the new rule: unrealised capital gains now count as income.

Imagine this scenario: a major property price surge happens, and your SMSF property gains 30% in value in a single year. The valuation reflects that increase, and you're suddenly faced with a massive tax bill.

You might be willing to pay it—but where does the money come from? Contributing more funds to the SMSF? There are caps on that. Selling stocks? SMSF property investors often don't hold much stock. The only option left: sell the property. And once you do that, the power of long-term compounding vanishes. Selling a property isn't a quick or easy process. What if you can't sell in time, and the ATO starts chasing the debt? What if the market dips while you haven't sold it? These are all real problems.

2. Property Prices Targeted by SMSFs Will Drop Significantly. A $3 million cap may sound high, but it's not. Say you buy a property worth $800,000 and hold it in your SMSF for 20 years. Assuming a 7% annual growth rate, it will be worth around $3.2 million in two decades. And since the $3 million threshold isn't inflation-adjusted, the only way to stay under it is to buy cheaper properties from the start. That means SMSFs will increasingly target lower-priced properties—like $650,000 houses—typically found in small towns or outer suburbs. This could actually trigger price surges in those areas.

3. Cash Flow Pressure Will Increase for SMSF Property Investors. If it's inevitable that your portfolio will surpass the $3 million mark one day, you'll have to plan for heavier tax burdens. That means selecting properties with stronger cash flow becomes critical. Residential properties with good rental returns will become more appealing. Some investors may even shift to commercial properties, which are riskier and slower to grow in value but offer better cash flow.

4. Alternative Investment Structures Become More Appealing. As SMSF regulations grow tighter, more sophisticated investors will begin exploring other vehicles—like family trusts, companies, or even direct personal ownership. Of course, the best option varies case by case, and there's no one-size-fits-all solution.

Planning Before Setting Up an SMSF

If you're considering using an SMSF to invest in residential property, here's how to approach it strategically: First, determine your retirement timeline. For example, if you're 45 now and plan to retire in 20 years, you'll need to ask, How many properties to buy? When to buy them? What's the maximum total purchase price?

Our rough calculation shows that to avoid paying any Division 296 tax over 20 years, you'd need to keep the total property value under $800,000 for the initial purchase. If you're okay with paying a small amount of tax up to the point that you should choose other structures to save on taxes, I call it the break-even point; you can go up to $1.5 million—assuming a 60% loan-to-value ratio.

Also, introduce a forward-looking risk mechanism: If your property increases in value by 20%, triggering a big tax bill, and you don't have cash, you might need to sell earlier to free up funds. And when selecting properties, always go for low purchase prices and solid rental income. Since SMSFs enjoy the lowest income tax rate at 15%, generating strong cash flow here is more efficient than in any other structure.

The 15% extra tax isn't the core issue. The game-changer is the tax on unrealised capital gains. So where is this going? Will it be scrapped one day? Let's take a look at history.

The Future of Unrealised Capital Gains Tax

During the economic turmoil of the 1970s and 1980s, several European countries explored the idea of taxing unrealised capital gains. Governments were facing high inflation, stagnant economies, and rising income inequality. To increase tax revenue, they started targeting the wealthy—especially those holding appreciating assets like property and shares.

One of the most well-known cases was Sweden in the late 1970s. They introduced a tax on unrealised gains to curb inflation and promote equality. The policy was simple: if your asset gained value—even if unsold—you paid tax on the increase.

But it didn't last long. The tax created serious liquidity problems. Property owners, in particular, couldn't easily sell assets to pay their tax bills. This caused a chilling effect—people and businesses became overly cautious, avoiding assets that could trigger tax liabilities. By the early 1980s, Sweden abolished the policy due to its negative impact on investment and economic growth.

Germany tried something similar in the 1980s, aiming to reduce wealth inequality. But the policy faced intense pushback—especially from the business sector. It was overly complicated to enforce and involved massive administrative costs. The system became inefficient and was eventually scrapped as well.

Sound familiar? Australia today is facing similar pressures: inflation and wealth inequality. The government, just like those in Europe back then, is looking to plug budget gaps by taxing the rich. The only thing we don't know is—how long will Australia stick with it? One year? Two? Five or ten?

Some might wonder: Will superannuation tax rules tighten even further in the future? Will the unrealised capital gains tax be extended to companies, trusts, or even individual investors? In my opinion, that would be extremely difficult. Most property investors hold assets in their own name. Plus, owner-occupied homes are exempt from capital gains tax. And investment properties get a 50% CGT discount if held for more than a year. Before expanding to unrealised gain taxes, it would make more sense to reduce these existing concessions—because it's simpler and less controversial.

Let's be honest: governments just want more revenue. But they can't afford to upset the majority. So they'll only ever hit a small group at a time. No tax policy that affects the majority will survive politically.

Perhaps, just perhaps, this policy will be eliminated by a future government.

That's why, after understanding the full background and impact of this tax, the key is to adjust your strategy. No one can predict the future. But the goal of financial freedom doesn't change. You just need to learn how to take a different path when the road ahead is bumpy.

Watch the video version of the blog on YouTube.