Key points
- Explains the tax design under previous legislation and how the new tax may operate
- Discusses the current status and timing of legislation for the new tax
- Outlines the controversial design features of the new tax
What was the proposed $3m super balance tax?
The proposal was for a 15% tax on earnings for superannuation account balances above $3 million. This would have been in addition to existing superannuation taxes and applied to the proportion of earnings above the $3m threshold across each financial year.
Everyone expects the Government will try to introduce the tax again in the same way but until legislation is introduced, the exact tax design is uncertain. Parliament resumes in late July 2025 which is the earliest legislation is likely to be publicly available.
We see some confusion regarding exactly how the new tax would apply, again assuming the Government introduces the tax in the same way as previously proposed.
Firstly, the taxes that currently apply to superannuation funds would not change. Some think the tax rate in the super fund will increase by 15% above $3m but this is not the case. Super fund income will continue to be taxed as it is today and will not be changed by the new tax.
The new tax is arguably not a superannuation tax, it is a tax levied against an individual based on the movement in their super balance across a year to the extent their balance exceeds $3m at financial year end. It is an entirely new tax and would operate separately to existing super fund taxes.
Under the new tax, the tax bill would be sent to the individual who can either pay personally or elect to have their super fund pay the bill. The new tax is probably better described as a wealth tax against individuals where the personal tax liability is determined by reference to the movement in their personal wealth held in superannuation and to the extent that their wealth exceeds $3m.
What is the current status of this tax?
As of April 2025, the legislation expired and did not pass Parliament. The bill failed to secure sufficient support in the Senate before Parliament was dissolved for the election. For the new tax to proceed, the Government will need to introduce new legislation and secure its passage through both Houses of Parliament.
It appears the Government intends to proceed with the new tax and with the composition of the Senate after the election changing with the balance of power shifting to the Greens, it does seem more likely that the Government could get the tax legislation through the new Parliament.
Parliament resumes in late July 2025 which is the earliest legislation is likely to be publicly available.
How would the tax have been calculated?
The tax would have used the formula: 15% × Earnings × Proportion of Earnings. The Proportion of Earnings would be calculated as: (Total Super Balance Current Financial Year – $3 million) ÷ Total Super Balance Current Financial Year. This meant only the portion of earnings on balances above $3m would be taxed.
What were considered ‘earnings’ under the proposal?
Earnings would have been calculated as the movement in total superannuation balance across the year, using: Total Current Year Balance – Total Previous Year Balance + Withdrawals – Net Contributions. Controversially, this would include unrealised gains from asset value increases as ‘earnings’ for the purpose of calculating liability to the new tax.
Would the $3m threshold have been indexed?
No, there was no indexation of the $3 million threshold. This was one of the contentious elements, as more people would be brought into the tax net over time without any adjustment to the threshold amount.
What would have happened with investment losses?
Negative earnings would not have resulted in tax refunds. Instead, losses would be carried forward and could only be used to offset future liabilities under this specific tax. This asymmetric treatment was another controversial aspect of the proposal.
Is it likely that the tax start date may change?
The new tax was originally stated to commence from 1 July 2025, and you could expect the start date may 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 – we will have to wait and see.
How would the tax have been paid?
The tax would have been assessed to the individual by the ATO, similar to Division 293 tax. Individuals could choose to pay the tax personally or elect for their superannuation fund to pay it on their behalf.
Should people with large super balances take any action now?
Without legislation there is still uncertainty as to exactly how the new tax might apply so for most people the better approach is probably to wait and see what eventuates before acting.
The likely impact of the new tax can be very different across different investment portfolios because of the taxing of unrealised capital gains which is something we have not seen before.
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. Under the new tax this type of investment portfolio would broadly see a tax rate increase from 15% to 30% (on the proportion above $3m) – but that would be expected to be lower, or at least no higher, than the tax rates available in an alternative investment structure.
Growth orientated investments, such as direct property or specific shares or managed funds with a focus on growth over income, would likely 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.
So longer term growth-orientated investments are likely to become relatively unattractive to hold in super under the new tax regime. If you currently hold assets like this in your super portfolio, while acting now is likely to be premature given there is no finalised legislation, we believe it is probably a good idea to start reviewing these asset types and considering the options available if the new tax does proceed as expected.
Could the tax design change?
Yes, the tax design might change on introduction of new legislation required to implement the tax. The previous tax design faced significant criticism for taxing unrealised gains and lacking indexation. New legislation could potentially address some of these design flaws, however the Government has so far shown no inclination to redesign the tax.
