Understanding Unrealised Capital Gains Tax

You’ve watched your investment property climb $200,000 in value. Your share portfolio’s looking healthier than ever. But what if you had to pay tax on those gains before you sold anything?

That’s the core question behind unrealised capital gains tax, a concept that’s sparked heated debate in Australia and overseas. With recent proposals from the Australian government to tax unrealised gains within superannuation accounts over $3 million, understanding this issue has never been more important for Aussie investors and retirees.

Key Insights

• Unrealised capital gains are the increases in value of assets you still own (you haven’t sold them yet.)
• Currently in Australia, you only pay capital gains tax when you sell an asset and “realise” the profit.
• Proposed Division 296 tax would impose an additional 15% tax on super balances over $3 million, including unrealised gains (though its status remains uncertain following political debate.)
• This matters because it could fundamentally change how Australians plan for retirement and manage investments.

What Is Unrealised Capital Gains Tax?

An unrealised capital gains tax is a levy on the increased value of assets you own, even though you haven’t actually sold them.

Here’s a simple example: You bought shares in an Australian company for $50,000. Today, they’re worth $150,000. That $100,000 increase is an unrealised capital gain – it exists on paper, but you haven’t received the cash yet because you haven’t sold the shares.

Under traditional Australian tax law, you’d pay no tax on this gain until you actually sell those shares. That’s when the gain becomes “realised.” But proposals for an unrealised capital gains tax would change this fundamental principle, requiring you to pay tax on the $100,000 increase even while you still hold the shares.

The concept isn’t entirely new. Norway and Switzerland have implemented forms of unrealised gains taxation, though Norway’s experience led to a “millionaire exodus” with wealthy individuals relocating $54 billion offshore. In the United States, President Biden’s 2025 budget proposal included a 25% minimum tax on unrealised capital gains for households with over $100 million in assets, though this proposal has stalled in Congress.

Australia’s Proposed Superannuation Tax Changes

Australia’s debate centres on proposed changes to superannuation taxation under Division 296 of the Income Tax Assessment Act 1997.

From 1 July 2025, the Division 296 tax would apply where a member’s total superannuation balance exceeds $3 million, imposing an additional 15% tax on top of the existing 15% superannuation tax. This effectively creates a 30% tax rate on earnings (including unrealised capital gains) for the portion of your super above the threshold.

What makes this controversial? The $3 million threshold is not indexed to inflation, meaning more Australians will be caught by this measure over time. While initially expected to affect around 80,000 members, inflation and investment growth could see this number climb significantly in the coming decades.

The proposed tax has sparked fierce debate, with concerns about:

Liquidity Pressure

You’d need to pay tax on paper gains without necessarily having the cash to do so. For SMSF members holding property or illiquid assets, such as farms or private businesses, this could force asset sales simply to pay the tax bill.

Fairness Concerns

Negative superannuation earnings are quarantined and don’t give rise to a refund, meaning if your super balance drops due to market downturns, you can only offset those losses against future gains, not receive a tax refund.

Precedent Worries 

If the government can tax unrealised gains in superannuation, what’s to stop future expansion to other assets like investment properties or shares held outside super?

It’s important to note that recent reports have been conflicting on whether this proposal will proceed. While some sources from late 2025 suggest the government has abandoned the unrealised gains approach, others indicate Labor remains committed following their May 2025 election victory. If you have significant superannuation balances, it’s essential to speak with an independent financial advisor to understand your specific situation.

How Australian Capital Gains Tax Currently Works

Under current Australian tax law, capital gains tax operates quite differently from the proposed unrealised gains approach.

You only pay tax on capital gains when you sell the asset and realise the profit. The gain is added to your assessable income and taxed at your marginal tax rate – the same rate you pay on your salary or business income.

Here’s the good news: Australian resident individuals who own an asset for 12 months or more are eligible for a 50% CGT discount. This means if you hold an investment property or shares for at least a year, you only pay tax on half the capital gain.

Some assets are exempt from CGT entirely. Your main residence (family home) generally doesn’t attract capital gains tax, provided you’ve lived in it and it meets certain criteria. Assets you acquired before 20 September 1985 are also exempt.

The current system gives you control over when you pay tax by allowing you to choose when to sell – a significant advantage for tax planning that could disappear under an unrealised gains tax regime.

Why This Matters for Your Financial Future

Whether you’re saving for retirement, building an investment portfolio, or running a business, the potential shift to taxing unrealised gains could fundamentally alter your financial strategy.

For retirees and pre-retirees with substantial superannuation balances, the Division 296 proposal presents a significant planning consideration. Even if the $3 million threshold seems distant now, inflation and strong investment returns could see more Australians affected over time.

The broader principle is what concerns many financial experts. Australia’s tax system has always distinguished between paper wealth and actual income. You don’t pay income tax on a pay rise you might get next year – you pay tax on money you’ve actually received. The same principle has applied to capital gains for 40 years.

Taxing unrealised gains shifts this foundation. It means paying tax on wealth that exists only on paper, that could disappear in a market downturn, and that you might not have the cash flow to cover.

For investors holding assets like property, shares, or business interests, this creates genuine challenges:

• Valuation complexity: How do you accurately value a private business, a commercial property, or a farm each year? Market valuations can vary significantly depending on methodology and timing.
• Market timing risk: Forced asset sales to pay tax obligations could mean selling investments during market downturns at the worst possible time.
• Strategic planning: If you’re working with an investment advisor to build long-term wealth, the tax treatment of unrealised gains needs to factor into asset allocation decisions, super contribution strategies, and retirement planning.

The international experience offers cautionary tales. Countries that have attempted broad unrealised gains taxes have either abandoned them or watched wealthy residents relocate. 

Plan Ahead with Professional Guidance

The debate around unrealised capital gains tax isn’t going away. Whether or not the current Australian proposal proceeds, the principle will likely resurface in different forms over the coming years.

That’s why working with qualified financial professionals is more important than ever. At Inovayt, our team of experienced advisors understands the complex intersection of tax law, investment strategy, and retirement planning. We can help you:

• Navigate the current capital gains tax system to minimise your tax liability legally.
• Understand how potential tax changes might affect your superannuation and investment portfolio.
• Develop strategies to protect your wealth regardless of how tax policy evolves.
• Make informed decisions about super contributions, asset allocation, and retirement timing.

For now, the Australian capital gains tax only applies when you sell assets and realise the profit. 

However, with political uncertainty surrounding Division 296 and ongoing debate about tax reform, staying informed and working with professional advisors is crucial for protecting your financial future.