How Labor’s super tax changes could reshape commercial property markets

The Labor government’s proposed tax on superannuation balances exceeding $3 million is poised to significantly impact Australia’s commercial property landscape, potentially triggering a major shift in investment patterns and market dynamics in a sector that has become increasingly dominated by self-managed super fund (SMSF) investors over the past decade.

There is already much discussion regarding individuals actively restructuring their superannuation portfolios in anticipation of the tax changes. This “panic selling” phenomenon could accelerate as the 1 July 2025 implementation date approaches. With the tax doubling the 15 per cent rate on earnings for balances over $3 million, and controversially applying to unrealised gains, resulting in many SMSF holders reassessing their property holdings. SMSFs have traditionally been significant investors in commercial property, with many business owners utilising their funds to purchase their business premises.

The tax on unrealised gains creates particular challenges for commercial property investors, who may face tax bills on paper gains without the liquidity to cover them. This could force premature asset sales in unfavourable market conditions. Many are already exploring options to move assets out of super and into alternative structures.

The past decade has seen a substantial shift in commercial property ownership patterns, with SMSFs emerging as major players across various sectors. This trend gained significant momentum following legislative changes in 2007 that allowed SMSFs to borrow for property investment through limited recourse borrowing arrangements. By 2024, SMSF investment in commercial property had reached unprecedented levels, representing a substantial portion of the $4.2 trillion superannuation sector.

Industrial property in particular has benefited from this trend, becoming the “golden child” of commercial investment for SMSFs. The sector has seen significant value appreciation during and after the pandemic, with logistics assets experiencing strong rental growth and sustained positive capital value movements. For many SMSF trustees, industrial assets have offered compelling investment characteristics including, relatively affordable entry points compared to other commercial sectors, strong tenant demand, and the potential for steady capital growth.

The appeal for owner-occupiers has been especially strong, with business owners using their SMSFs to secure their business premises, effectively insulating themselves from rental market fluctuations. This strategy has provided business stability while building retirement wealth, with the added advantage of paying rent to their own fund rather than to external landlords. The self-managed super fund sector has been particularly active in smaller industrial units and last-mile logistics facilities, contributing to the industrial sector representing up to 60 per cent of all major commercial deals during much of the pandemic period and beyond.

Commercial property market implications

The flow-on effects to commercial property markets from the proposed tax changes could be substantial across all sectors. The office market, already struggling with high vacancy rates, may face additional pressure if SMSF investors withdraw, particularly in the secondary office segment. Meanwhile, the industrial sector could see its investor profile shift significantly after being the asset of choice for the last decade. Regional commercial assets have benefited strongly from SMSF investment, and may experience diminished activity, while the emerging retail revival also risks losing momentum if SMSF investors reduce their exposure.

For owner-occupier businesses who have used their SMSFs to purchase their premises, the changes present a challenging dilemma. Many will need to reassess whether maintaining these assets within their super fund remains optimal, potentially leading to a restructuring of long-standing business arrangements. Business owners approaching retirement who had planned to sell their business but retain the property within their SMSF as an income stream may need to reconsider these strategies.

The absence of indexation in the $3 million threshold compounds these market pressures, with economic modelling suggesting many middle-income Australians will eventually be captured by the tax due to compound growth and inflation. This creates longer-term uncertainty for commercial property markets as future generations may approach superannuation investment differently.

As the proposed implementation date approaches, commercial property markets will likely experience a period of transition. While SMSF driven selling could create downward pressure on certain market segments in the short term, it may also create opportunities for non-super investors able to capitalise on any increased listing supply. For many investors, seeking out alternative investment structures, including direct property ownership outside super and family trusts may be the answer, which could ultimately reshape ownership patterns across the commercial property landscape.

For a commercial property sector that has come to rely heavily on SMSF investment over the past decade, the adjustment period could be significant, with potential impacts on valuations, transaction volumes, and the fundamental investor profile across all major commercial property types.

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Vanessa Rader | Ray White Head of Research