Taxing unrealised gains could create cash flow ‘mismatch’ for illiquid assets: Property Funds Association of Australia

Taxing unrealised gains could create a cash flow ‘mismatch’ for longer-term, illiquid investments including unlisted property, according to the peak body for the unlisted property funds industry in Australia, Property Funds Association of Australia (PFA).

The introduction of the new tax on unrealised capital gains for superannuation balances exceeding $3 million is widely anticipated as part of the Treasury Laws Amendment (Better Targeted Superannuation Concessions) Bill 2023, set to take effect on July 1, 2025 (while the tax is proposed to commence from 1 July 2025, it is not yet law). 

Paul Healy, CEO of the PFA, said the introduction of this tax could create wider implications for investors holding illiquid assets such as fixed-term property funds or trusts. “There is a fundamental mismatch which can occur when taxing unrealised gains on illiquid assets such as direct property investments. 

“These investments commonly have a timeline of five to 10 years, and valuations can fluctuate within this timeframe. 

“The mismatch occurs where investors might have to pay taxes on gains without receiving any distributions or cash proceeds from a sale. They will have to fund the Tax from other sources, potentially from outside the superannuation account or from borrowings.

“Having to pay tax based on paper gains that could later reverse introduces a degree of uncertainty, and it is currently unclear as to how unrealised capital losses will be offset against unrealised capital gains.”

Key characteristics of the new tax

Any individual whose total superannuation balance exceeds $3 million at 30 June 2026 will be subject to the tax, with the tax assessed on earnings for the 2025–26 financial year, though it is not yet law. This includes balances in both accumulation and pension phases. 

The tax applies to unrealised capital gains, which means gains on paper, even if the asset hasn’t been sold. Negative earnings won’t result in tax refunds but would be carried forward and used to offset future liabilities under this specific tax.

The $3m threshold is not indexed, so more individuals may be captured over time as their balances grow.

The tax will be assessed to the individual, not the fund. 

Wider implications from taxing unrealised gains

PFA said the unrealised gains component of the tax will likely have wider implications for investors, property valuations, and the Australian economy.

Investors with illiquid investments, such as property or start up investments, will be most negatively affected as they could see large unrealised gains without the income to support a tax payment. 

Some investors may have difficulty in meeting their tax liabilities without selling assets. 

Property valuations will also be impacted, as valuations will determine tax liability. PFA said disagreements or uncertainty around valuations could be problematic for investors and give rise to more disputes with the Australian Taxation Office.

Taxing unrealised gains might also distort investment allocations by forcing more investors to prioritise liquid assets over illiquid ones. 

Mr Healy said illiquid investments drive important economic activity, with unlisted property funds and trusts essential for advancing long-term building projects, which in turn benefit Australia’s economy. 

“Sometimes what seems like a modest change can have larger implications. We urge government to address these potential negative repercussions from taxing unrealised gains on illiquid assets”, Mr Healy concluded.