The proposal which could come into effect on the 1st July 2025, aims to double the tax rate from 15 per cent to 30 per cent on earnings (including unrealised capital gains) for superannuation balances exceeding the $3 million threshold. Unlike previous superannuation reforms that focused on contribution caps or realised earnings, this marks the first time unrealised gains would be subject to taxation in the superannuation environment.
Residential property investments within SMSFs present unique challenges under the proposed tax regime. When a property experiences significant capital appreciation on paper, the resulting tax liability would require cash payment even though no actual sale has occurred. Unlike shareholders who can sell a portion of their holdings to cover tax obligations, property is indivisible, creating potential liquidity crises for SMSF trustees.
For example, an SMSF with a $2.5 million residential investment property that appreciates to $3.5 million would trigger tax obligations on the unrealised portion of the gain that exceeds the threshold. Without adequate cash reserves, trustees might be forced to sell the entire property or seek alternative funding sources to meet these obligations.
Possible impact on the residential property market
Residential properties held within SMSFs already operate under strict regulatory constraints. These assets cannot be rented to or occupied by fund members or their relatives, cannot be improved using borrowed funds under limited recourse borrowing arrangements, and must satisfy the sole purpose test of providing retirement benefits to members. These restrictions, combined with the new tax implications, may significantly reduce the attractiveness of residential property as an SMSF investment vehicle.
This could lead to broader market implications such as potential listing supply increases and a shrinking pool of rental properties if SMSF trustees reconsider their investment strategies or restructure their portfolios before the implementation date. The tax change could drive structural shifts in residential property investment patterns, including a reduction in SMSF residential property holdings, particularly for those approaching the $3 million threshold.
There may also be increased preference for commercial properties that might deliver stronger income yields relative to capital growth, movement of assets into alternative tax-efficient structures outside superannuation, and potential migration of property investment capital into primary residences, which remain tax-exempt.
In the long term, this policy could impact residential property valuations in specific market segments. Properties typically favored by SMSF investors are often in the middle to upper price brackets in metropolitan areas, and might experience pricing adjustments as demand from this investor class diminishes.
The proposed changes form part of a broader reevaluation of Australia's retirement savings framework. While presented as affecting only a small percentage of superannuation accounts currently, the absence of indexation for the $3 million threshold means an expanding portion of retirement savers will likely be impacted over time as asset values grow. For residential property investors using SMSFs, these changes represent a significant shift in the investment landscape, potentially altering the risk-return calculations that have traditionally made residential real estate an attractive component of retirement portfolios.