Fundy animated on taxing unrealised capital gains

The Government’s proposals to tax unrealised capital gains have been raised in the final week of the election campaign with PrimaryMarkets chairman, Jamie Green, claiming it could prompt a mass withdrawal of money from superannuation, particularly self-managed super funds (SMSFs).

While the Coalition Liberal and National Parties (LNP) have extracted little political mileage from the issue during the election campaign, Green is describing the proposal as a ‘Trojan Horse’ and an “tax on hypothetical profits’.

He said the plan would see investors taxed not only on realised profits but also on paper gains, basically theoretical increases in asset value that have not been sold or crystallised.

“Essentially, this is a tax on hypothetical profits,” Green said. “The investor has not received any cash benefit, and worse, the asset might later fall in value, leaving them taxed on gains that were never realised.”

He said the change, if implemented, could have dramatic consequences, not only eroding personal wealth but also harming Australia’s attractiveness to foreign investors by introducing a new sovereign risk.

Green also suggests that the proposal might represent a ‘Trojan Horse aimed at normalising the idea of taxing unrealised gains”.

Once accepted within the superannuation system, he argues, it will likely be expanded to cover all assets including shares, property, and private investments forcing Australians to pay annual taxes on asset values regardless of whether they ever sell or profit.

“Compounding the problem, if asset values fall, taxpayers will not receive cash refunds for previously paid taxes; instead, they would carry forward losses, which may or may not be useful in the future,” he said.

Green clamed a further concern is the risk of encouraging short-termism across Australian markets.

“Investors would be incentivised to sell assets every year to cover tax bills, resulting in a rolling 12-month investment cycle rather than building long-term portfolios. This would hurt not only individuals but also start-ups and businesses that rely on patient capital to grow, particularly those offering illiquid or innovative investment opportunities.

“Even ordinarily liquid ASX-listed shares could become problematic under this system if, for example, investors are subject to escrow periods preventing immediate sale while still being taxed on paper gains. According to Green, the mass withdrawal of money from superannuation, especially from SMSFs, to stay under the $3 million threshold is a likely outcome.

“This, combined with the drying up of available risk capital, could leave Australia’s entrepreneurial ecosystem severely weakened,” he adds.