What makes the measure so contentious is not only the additional impost on higher balances, but the inclusion of “unrealised capital gains” in the calculation of earnings. For the first time, individuals could be taxed on paper gains, even where no asset has been sold.
For advisers working with high-balance SMSFs and wealthier clients, the implications are profound.
In our view, the concept of taxing unrealised gains is unprecedented in Australia’s superannuation system, and raises real concerns around fairness and long-term implications.
Without indexation, the $3 million threshold will also pull more Australians into the net over time. In our experience, advisers are already considering how best to position portfolios in anticipation of the change.
Implications for SMSFs and portfolio construction
While Division 296 is intended to affect only a small proportion of members, SMSFs are disproportionately represented in this cohort. Advisers are likely to see clients become more hesitant to build super balances beyond the $3 million cap, instead seeking alternative vehicles — such as trusts or companies — to house additional wealth.
The design of the measure also changes the relative attractiveness of different asset classes. Where unrealised capital growth can give rise to a tax liability, income-producing investments become more appealing.
In our view, if there is going to be a tax on unrealised gains, then investors will naturally prefer products that generate realised income, rather than those reliant on capital appreciation.
Why private credit is gaining attention
Private credit — particularly when backed by tangible assets like real estate — is by design an income-generating asset class. Capital is lent, usually on a secured basis, with interest flowing back to the investor.
In Zagga’s case, loans are predominantly secured by first-mortgage property collateral, typically at or below 65% LVR, ensuring a significant equity buffer beneath the investment.
This means returns are delivered as regular interest income — generally monthly or quarterly — with yields linked to the RBA cash rate plus a margin. Unlike equities or property, there is no expectation of capital appreciation, and therefore no exposure to a tax liability on unrealised gains.
For advisers, this offers an avenue to meet client demand for:
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steady, realised income streams
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capital preservation through secured lending
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diversification away from traditional equities and bonds.
Balancing risk with discipline
Of course, private credit is not without risks. Borrower default is possible, and investors must rely on the manager’s expertise in structuring, monitoring and, where necessary, enforcing loans.
The difference lies in rigour:
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Zagga has originated more than $2.5 billion in loans since 2016, returning over $1 billion of principal and interest to investors
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each loan undergoes multi-layered credit assessment, stress testing, and ongoing monitoring
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investors can access diversified funds, or select individual loans, depending on risk appetite and desired yield.
Defaults do happen. But the safety net is the quality of the manager, the underlying security and conservative LVRs. Private credit, when managed properly, is a strong defensive component in a well-balanced portfolio.
Beyond Division 296: a structural allocation
While Division 296 may act as a catalyst, the case for private credit extends beyond the tax debate.
For advisers, the asset class provides a way to:
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enhance portfolio income,
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reduce correlation with equity market volatility, and
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support diversification through exposure to alternative credit.
As we see it, private credit certainly has a role to play for high-balance SMSFs responding to Division 296. But more broadly, it deserves a place in any well-constructed portfolio as a reliable way to earn predictable income — often more consistently than hybrids or traditional bonds.
Disclaimer: This article is general information only and does not constitute financial product advice. Advisers should consider their clients’ circumstances and obtain independent advice before making any investment decisions.
About Zagga
Zagga is a leading Australian alternative real estate investment manager founded in 2016. Headquartered in Sydney, and with offices in Melbourne and Singapore, Zagga is committed to delivering attractive, risk-adjusted investor returns, and tailored private credit solutions, across the capital stack.
A leader in their chosen niche of mid-market loan sizes ranging from $5 million to $75 million, the firm serves a growing base of wholesale investors, including HNW individuals, family offices, and quasi-institutional funders from Australia, China, Hong Kong, Israel, Japan, Mauritius, Singapore, South Africa, Switzerland, the UK, and the USA.
Since inception in 2017, they have repaid over $1 billion in principal and interest, across more than 150 successful exits.
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