High net worth wake-up call to SMSFs as deposit rates hit 3-year lows

Australia’s high-net-worth investors and self-managed super funds (SMSFs) are facing challenges on several fronts. Cash balances are hitting record highs as interest rates plummet and the Federal Government looks to increase taxes on large superannuation balances.

New data from the ATO reveals that SMSFs are piling into cash investments at levels never seen before. This ‘flight to safety’ is hardly surprising given greater share market volatility and economic uncertainty, but it also signals a deeper anxiety among investors, a sentiment that could intensify as the Federal Government sharpens its focus on large superannuation balances.

The ATO reveals that SMSFs assets under management stood at $1.01 trillion in the March 2025 quarter; SMSFs increased their cash holdings to a record $161.6 billion, up from $160.6 billion in December 2024 to account for around 16% of overall SMSF assets under management (AUM). That’s 16% of $1.01 trillion earning paltry, inflation-adjusted returns.

Compounding this is the likelihood that the Reserve Bank of Australia (RBA) will cut interest rates again later in 2025, as economic growth slows and inflation potentially eases more. If more rate cuts do eventuate, today’s already low term deposit yields of below 4% could fall even more, leaving SMSFs and retirees with even fewer low-risk options for income.

Division 296: the new challenge for super’s top end

Another shake-up for SMSFs and high-net-worth Australians is likely to be the looming change to superannuation tax rules. From 1 July 2025, the government proposes to double the tax rate on earnings attributable to the portion of a person’s superannuation balance above $3 million to 30% from 15%.

Importantly, this new Division 296 tax will apply not just to realised gains, but also to unrealised gains—that is, increases in asset values even if the assets haven’t been sold.

If the legislation passes through the Senate, Australians with superannuation balances above $3 million would be taxed an additional 15% on the earnings attributable to the portion of their balance above the $3 million threshold.

This tax could reshape long-term retirement strategies for individuals and SMSFs alike. For SMSFs holding illiquid assets like property, the risk is even greater: a tax bill on an asset revaluation, with no cash flow to pay it, could force unwanted asset sales or liquidity crises.

The government estimates only about 80,000 people will be affected initially, but the $3 million cap is not indexed to inflation. Over time, more Australians will find themselves caught in this net, as wage growth and inflation push balances higher.

Private credit: a potential solution

Faced with these challenges, SMSFs and investors would be wise to reconsider their asset allocations into credit assets. Income assets, like private credit, could help them manage a higher tax bill arising from Division 296 tax liability.

Private credit, which is comprised of loans to businesses, often through unlisted funds, has emerged as a compelling alternative. Its appeal is twofold: predictable, income-based returns through interest payments on the debt, and minimal mark-to-market revaluations, especially if held in unlisted vehicles. This could help SMSFs minimise exposure to the paper gains that the proposed changed to Division 296 seeks to tax.

For those nearing the $3 million super cap, private credit offers a way to minimise tax drag from unrealised gains, earn a strong yield in a lower-risk asset, and reduce exposure to the volatility of listed equities.

However, private credit is not without its risks: it can be illiquid, requiring investors to lock up capital for long periods, and higher yields than cash reflects the higher risk associated with private credit. Manager quality and underwriting standards are paramount. Still, the era of ‘set and forget’ superannuation is over. Proactive planning, diversification, and a willingness to embrace new asset classes will be essential to maximise returns. Private credit assets could be an important part of that reassessment of asset allocations.

Currently, private credit offers a higher income than cash and term deposits, at between 8% and 10% p.a. This makes it an even more attractive proposition for SMSFs and individuals to consider the switch from cash and term deposits.