The changes at a glance
I should point out from the outset that these measures are only proposed at this stage. They will need to go through the usual parliamentary process before being legislated. Given the measures aren’t to take effect until after the next Federal election it will be very much a case of ‘watch this space’.
So what are the proposed changes?
Under the current system, anyone with a superannuation balance that isn’t in the retirement phase generally incurs tax of 15% on the earnings of the fund. These earnings may include interest, dividends, capital gains, rent etc.
This 15% tax rate applies to most people that are still working and in the accumulation phase.
So if you have $100,000 accumulated in your superannuation fund and it generates net income/earnings of $10,000 in a financial year then the fund will pay $1,500 (15%) in tax on those earnings.
If you have $10m in your superannuation fund and it generates net income/earnings of $1m then the fund will still pay the 15% tax rate.
If you are the lucky punter that the Government singled out as having over $400m in your superannuation fund then you still get the benefit of the 15% concessional tax rate.
Under the proposed changes, if you personally have superannuation accounts totalling more than $3m then you will incur an additional 15% tax on a proportion of the earnings of your fund(s).
How will it work?
The good news first - this proposed new measure won’t directly impact the large majority of us!
Treasury estimates that come 2025/26 it will impact some 80,000 individuals – representing just 0.5% of the population with a superannuation balance.
Clearly though, this proposed new measure is going to have an impact on those who currently have a balance greater than $3m. Furthermore, given these measures aren’t proposed to apply until the 2025/26 financial year then it will be food for thought for those with balances under $3m with plans to accumulate further wealth in the superannuation environment.
It’s important to note that the extra 15% tax isn’t levied on all the earnings, it’s only applicable to the earnings proportionately applied to the balance above $3m.
As a simple example;
This $1m represents 25% of your total superannuation balance.
As a result you would incur the extra 15% tax on 25% of the earnings of the fund (although the proposed definition of earnings includes unrealised gains – see “Areas of conern” below).
The remaining 75% of the earnings would continue to incur the normal 15% tax.
Note that these changes are intended to begin in the 2025/26 financial year, thus initially it will be your balance as at 30 June 2026 that determines if the new tax will apply or not.
That is, if your balance is over $3m as at 30 June 2026 then the new tax will apply.
If your balance is over $3m throughout the 2026 financial year but then at 30 June 2026 it is under $3m then the tax won’t apply.
What else do we know?
The $3m threshold includes all of a member’s super balance, ie. both their pension and accumulation accounts combined.
The $3m threshold won’t be indexed each year – so it won’t increase with inflation. This will bring more superannuation balances into the firing line in the future.
The tax will be charged to the individual, not the superannuation fund. There will be the option however to have the superannuation fund pay for it.
Areas of concern
Probably the biggest discussion point to arise from the announcement to date has been around the determination of ‘earnings’. Per the current guidance the calculation involves comparing your balance at the end of the financial year with the balance at the start.
This necessarily involves recording gains/profits made on investments you sold throughout the year.
It also involves recording the increase in value of investments that you haven’t sold!
Thus you could have a situation whereby a superannuation fund has seen a substantial increase in the value of a particular asset (eg. a share portfolio or a property) that it hasn’t sold. If this results in an additional 15% tax payable under these new rules then superannuation fund members could find themselves in a tricky cash flow position – being that they need to fund a tax bill that has been largely driven by an asset they haven’t received any proceeds for!
I think we can expect to see a lot more commentary on this point in particular.
Where to from here?
Undoubtedly there will be quite a bit of noise in the media on this one so it will pay to stay attuned if these proposed changes are of relevance to you.
Given there is a significant lead time on the proposed implementation of these measures (not applicable until the 2026 financial year) there will be the opportunity for superfund members to analyse their position and plan accordingly.
Our team at BLG Business Advisers are Wollongong Accountants who service all around Australia, so we can assist you wherever you’re located. As always feel free to talk with us if you have any queries on this topic or other challenges you or your business are facing.