On Tuesday 28 February 2023, the Federal Treasurer, Jim Chalmers announced that from 1 July 2025 (if the Labor Government is re-elected), a 30 per cent tax rate will apply to earnings for super balances above $3 million. On 1 March 2023, Treasury released a 'Better targeted superannuation concessions factsheet' (Fact Sheet) outlining the changes.
What are the changes?
From 2025-26 onwards, in addition to the current 15 per cent tax payable by the super fund, members with "Total Superannuation Balances" (TSBs) above $3 million will pay 15 per cent tax on a proportion of future earnings. The TSB is already reported by the super fund to the ATO annually.
What is the concern?
The Albanese Government believes the "modest adjustment to tax breaks" will affect "less than 0.5 per cent of all Australians" which is "expected to generate revenue of about $2 billion in its first full year".
There is public support for super funds with mega-balances to pay a greater amount of tax. Under the measures, the $3 million cap is not adjusted for inflation. In practice, not indexing the $3 million cap on super will impact younger Australians, many SMSFs and more small business retirees than envisioned. The proposed $3 million cap is equivalent to $1.1 million for a 25 year old and $1.6 million for a 40 year old.1
How is super currently taxed?
Currently, earnings from superannuation are taxed:
- in retirement (also known as pension) phase below the Transfer Balance Cap (TBC), which limits the amount that can be transferred into retirement phase. This will be indexed to $1.9 million from 1 July 2023 (previously capped at $1.7 million since 1 July 2021 and $1.6 million since 1 July 2017) - tax-free;
- in retirement phase above the TBC - 15 per cent2; and
- in accumulation phase - 15 per cent3.
This will continue for all super balances below $3 million.
On the death of a member of a super fund, a death benefit can be paid to a tax-dependant (e.g. spouse or de facto of any sex), tax-non-dependant (e.g. adult child) or to the deceased estate. Under tax law, non-dependants of a deceased super fund member are required to pay tax on some elements of the lump sum death benefit they receive. This can be up to 32 percent. The ATO may take a cut of your super death benefit if you do not start planning to leave your benefits in the most tax effective manner possible for your beneficiaries.
How will the ATO calculate earnings in a financial year?
The additional 15 per cent tax only applies to the proportion of earnings corresponding to balances above $3 million for each member.
The ATO will use a formula to calculate the earnings using information it already receives from the super fund. The formula will calculate the difference between the member's TSB for the current and previous financial year and adjust for net contributions (excluding contributions tax paid by the fund on behalf of the member) and withdrawals. This calculation includes all notional (unrealised) gains and losses in determining earnings of the super fund.
This goes against the general principle of paying tax on income derived or on realised gains. Assets with high investment performance will be taxed regardless if a disposal has not occurred. This means if an asset increases in value from one financial year to the next, the unrealised gain will be taxed.
Example (extracted from the Fact Sheet)
Warren is 52 with $4 million in superannuation at 30 June 2025. He makes no contributions or withdrawals. By 30 June 2026 his balance has grown to $4.5 million.
This means Warren's calculated earnings are:
$4.5 million - $4 million = $500,000
His proportion of earnings corresponding to funds above $3 million is:
($4.5 million - $3 million)
$4.5 million = 33%
Therefore, this tax liability for 2025-26 is: 15% × $500,000 × 33% = $24,750
What happens if the asset value drops from over $3 million to less than $3 million the following year?
If the asset falls in value in the following year, the negative earnings can be carried forward to offset against future years' tax liabilities.
The proposed tax on unrealised gains will cause cashflow concerns for members who do not have cash to pay for the tax. Where the super fund comprise of assets (such as real property or unlisted securities) it may be difficult to sell the asset or withdraw the proceeds if a member has not met a condition of release (e.g. attained age 65 or 60 and retired). Younger members with high growth investments (for e.g. in start-ups) may need to consider other structures if the proposals proceed in their current form.
Is there a limit on the size of superannuation account balances?
No. These changes do not impose a size limit on superannuation account balances in accumulation phase. However, balances above $3 million will be subject to a higher tax.
Who pays the tax?
The tax is payable by the member of the super fund. Similar to the current Division 293 tax, the assessment will be issued to the member and not the super fund. The member will have the choice of paying the tax out-of-pocket or from their super fund. A member with balances in multiple funds can chose from which fund the tax is paid.
What should you start to do if you have a high super balance?
Members with sufficient super to support their own retirement and/or have higher balances should prioritise their estate and succession planning objectives to:
- Equalise and top up their spouse's super balance by making contributions; or
- use other investment structures (such as trusts and companies) which do not tax unrealised gains; or
- withdraw super balances and gift amounts to their children and grandchildren during their lifetimes.
The Government is consulting with the public and industry bodies. It is likely that the issues concerning unrealised gains and indexing of the $3 million cap will continue to be refined before legislation is introduced.
- How will defined benefits be taxed? The Government intends to apply 'broadly commensurate treatment'. The Government will consult further on the appropriate treatment.
- When will legislation be introduced? 'As soon as practicable', subject to further industry consultation.
1 MEDIA RELEASE: DISTRIBUTIONAL ANALYSIS OF AN UNINDEXED $3 MILLION SUPERANNUATION BALANCE CAP - Financial Services Council (fsc.org.au)
2 For some members the effective tax rate may be lower due to eligibility for dividend imputation credits for company tax paid and the 1/3rd capital gains tax discount.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.