Key points
- While still subject to legislative passage it is looking increasingly likely that the Government still intends to introduce the new tax.
- It will mean that income, such as interest, derived on super balances above $3m will be taxed at broadly 30% (15% fund tax rate and 15% new tax rate)
- Individuals with large super balances should be considering the best approach if the new tax is implemented as currently expected
The future of the proposed 30% tax on superannuation member balances above $3m (which includes the proposal to tax unrealised capital gains in super) is very much at the forefront of our current thinking.
There has been no official Government announcement identifying whether the tax will proceed, or any associated timeframe – however, the conduct of the Treasurer since the Federal election, combined with the fact that projected revenues remain within budget estimates, suggests the Government still intends to introduce the new tax.
For those who may be impacted by the new tax, we set out below our thoughts on what may eventuate and what planning options can be considered.
Will the new tax proceed?
It is difficult to say with certainty, but it appears the Government intends to proceed with the new tax. With the composition of the Senate after the election, and the balance of power shifting to the Greens from 1 July 2025, all signs point to it being easier for the Government to get the tax legislation through the next Parliament.
Will the tax design change?
The two most controversial elements of the previous tax design were:
- the outcome that unrealised capital gains would be subject to the new tax and
- the non-indexation of the $3m threshold where the new tax commences to apply; meaning more people would be impacted over time.
There has been consistent feedback to Government that these controversial elements should be changed, and making these changes would be reasonably simple. However, the Government has shown no inclination to redesign the tax and that’s unlikely to change, particularly with a more favourable Senate in place.
Will the tax start date change?
The new tax was originally stated to commence from 1 July 2025, and you could expect the start date would be deferred to allow for appropriate planning. However, it is possible the Government may legislate for the new tax to start from 1 July 2025 as was contemplated in the previous legislation – so we will have to wait and see.
Expected impacts of the new tax and planning options
The big question is if you are likely to be impacted by the new tax, is there anything you should be doing now? The answer depends on your individual circumstances.
The new tax (if we ignore the impacts of the pension exemption) will have two major impacts:
- Income, such as interest, derived on super balances above $3m will be taxed at broadly 30% (15% fund tax rate and 15% new tax rate) – although the real tax rate on income will depend on market value movement in asset values across a year as a decline in asset values could offset some or all of the new tax liability on income
- Capital gains, assuming assets have been held for greater than 12 months, will be taxed at broadly 25% (10% fund tax rate on realisation after applying the available discount and the 15% new tax rate on unrealised gains along the way while the asset is held by the super fund) – although the real tax rate on capital gains will also depend on market value movements in the asset over its holding period and may be higher if the asset value increases but then decreases prior to disposal.
For those who might consider unwinding their super fund as a result of these changes, these tax rates would need to be compared to the tax rates that would apply in an alternative investment structure. Any transaction costs that might be incurred in a restructure would also need to be considered.
In our experience a super fund is likely to continue to be the preferred tax structure for long term investment where the super fund is holding a traditional investment portfolio. This is typically because the majority of earnings are generally derived as ordinary income with some capital gains – a proportion of which are generally realised on an ongoing basis. Under the new tax regime this type of investment portfolio would broadly see a tax rate increase from 15% to 30% – but that would be expected to be lower, or at least no higher, than the tax rates available in an alternative investment structure.
Any growth orientated investments, (such as direct property or specific shares or managed funds with a focus on growth over income), are likely to be unappealing assets within super as part of the new tax regime. This is because you would be paying at least 25% tax in super on the capital growth (and having to pay the new 15% tax on unrealised gains along the way). In an alternative investment structure, you would expect to pay no more than 23.25% tax on capital growth (after discount) and you would only be asked to pay tax when the gain is realised – which can potentially be deferred across generations for longer term assets intended to be maintained within the family group.
So longer term growth-orientated investments are likely to become relatively unattractive to hold in super under the new tax regime. If you do currently hold assets like this in your super portfolio, these asset types should be reviewed and the options available considered if the new tax does proceed as expected.
There are a range of options that can be considered including:
- Transferring those assets out of super where access to super is available
- Realigning asset exposures across the family group with a focus on switching growth assets out of super for income orientated assets from other family structures
- Considering liquidation if appropriate
- Maintaining the super fund as is
- A combination of all the above.
The right approach will depend on individual circumstances and preferences.
Will there be an opportunity to unwind after 1 July 2025?
Under the previous legislation, the $3m threshold test was applied on the last day of the financial year. That is, while the new tax was stated to commence from 1 July 2025, provided your super balance was $3m or less at 30 June 2026, no additional tax liability would apply.
So, if the previous tax design is adopted (and even if the new tax commences from 1 July 2025), those who choose to unwind a super balance to the $3m threshold or less by 30 June 2026 should not incur any liability to the new tax.
Valuations – 30 June 2025
We recommend you pay particular attention to 30 June 2025 valuations of unlisted super fund assets. The new tax will apply on market value movements in asset values across a financial year and potentially apply from 1 July 2025. Making sure 30 June 2025 valuations of unlisted assets are correct will be particularly important.
Conclusion
While there is currently no certainty concerning the likely outcome, in our view individuals who may be impacted by the new tax be should start considering the best approach if the new tax is implemented as currently expected.
If you would like to discuss your circumstances further, please reach out to your Pitcher Partners representative.
