Tax has historically been levied on realised gains - profits made, not valuations. Division 296 breaks that tradition, creating a scenario where investors may owe tax on unrealised gains – values that could just as easily reverse.

While initial projections show only a small cohort being affected by this tax, the threshold is not indexed and that $3 million figure will capture an increasing number of Australians over time – not necessarily because they are wealthy but because inflation erodes purchasing power.

What $3 million buys today will differ in 10 years.

This adds complexity for investors: it’s no longer just about selecting asset classes, but about structuring portfolios to manage tax exposure.

This will be especially challenging for illiquid assets, such as unlisted property or private equity, which can see valuations rise without the ability to realise those gains or fund the tax liability.

While the government’s goals of equity and sustainability are worthy, this particular change presents very real consequences for asset allocation.

Investors are likely to be very reticent to build up super balances that trigger this added tax and may look for other structures - trusts or companies - to preserve flexibility and control.

But perhaps the more interesting pivot is within investment portfolios themselves – investors will naturally reassess the types of returns their portfolios generate, preferring investment options that deliver income – where you don’t have the capital appreciation and the tax is paid on income once received, not notional, paper-based gains.

This is where private credit – particularly real estate-backed lending – can play a role, offering predictable, consistent income backed by real assets and often demonstrating low correlation to equity markets.

Real estate private credit is typically structured with conservative loan-to-value ratios and senior secured positions in the capital stack, offering built-in downside protection. For investors, this means lower risk of capital erosion while maintaining steady yield – even in volatile or inflationary environments.

Moreover, with real estate private credit, loans are commonly structured with floating interest rates, meaning returns move in line with the prevailing cash rate. While total returns may fluctuate with rate movements, when rates fall, as we are seeing in Australia, the margin above the cash rate remains.

For HNW and SMSF investors potentially impacted by Division 296, the benefit is clear: a dependable income stream that avoids the risk of being taxed on fluctuating, and potentially illiquid, unrealised gains.

Beyond the Division 296 debate, private credit deserves a place in any well-constructed, well-balanced, and well-diversified portfolio as a way to earn income – one that’s more predictable, consistent, and attractive than you're likely to earn through traditional defensive assets.
Globally, the asset class is forecast to grow to US$2.8 trillion by 2028 . Locally, private credit now represents roughly 17% of Australia’s $500 billion commercial real estate debt market, and growing.

This evolution isn’t just market-driven – it’s behavioural. As policy evolves and macro conditions remain uncertain, investors are actively seeking ways to insulate portfolios from volatility – or at least smooth it out. Its ability to improve tax efficiency will provide an additional tailwind for private credit.

Division 296 is still under debate and may not pass in its current form. However, its very existence signals a shift in the policy environment – and savvy investors are already adapting. The winners in this new landscape will be those who anticipate change rather than react to it. That means rethinking where wealth is held, how it generates returns, and whether today’s paper gains are tomorrow’s liabilities.