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Update on the proposed $3m super balance tax
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Update on the proposed $3m super balance tax

We understand that the recent proposal to impose an additional tax on superannuation balances greater than $3m may be causing you concern and questioning whether you should be doing anything with your super.

We wanted to provide you with the latest information we have on the proposed new tax and insights to those who may be impacted.

Background

The Government announced an intention to legislate an additional 15% tax on earnings on superannuation account balances above $3m on 28 February 2023. Treasury then released an information sheet detailing how they see the new tax operating.

The initial design of the new tax released by Treasury was more severe than what was generally expected in the superannuation industry. This is mainly due to the new tax applying to unrealised capital gains in a superannuation fund and the $3m member balance threshold (where the new tax will commence to apply), would not be indexed.

It is important to recognise that at this point the new tax is a proposal only and is subject to a consultation process and then the Parliamentary process. The stated commencement date for the new tax is 1 July 2025 with the first key date being 30 June 2026, which is the first time superannuation balances would be aggregated and tested against the $3m threshold.

Consultation process

Treasury released a formal Consultation Paper on 31 March 2023 seeking public comment on the proposed tax design approach.

The Consultation Paper confirmed the Government’s preferred approach is to impose a new 15% tax directly on individuals based on the changes to their total superannuation balances during an income year to the extent that their balances exceed $3m at year end. The stated commencement date of 1 July 2025 has not changed.

We made a submission to Treasury confirming that we do not support the current policy design approach, principally by reason that taxing unrealised capital gains is a radical departure from the current system of taxing income in Australia which cannot be supported and due to the lack of indexation of the $3m threshold, which would significantly broaden the reach of the new tax beyond its stated scope over time.

You can read our submission here.

Key considerations

Our main message is that we do not believe there is an immediate need for you to withdraw superannuation balances because of the proposal, we need to wait and see what eventuates before determining the best approach.

We do not see a need for you to stop making contributions to superannuation. If you will be impacted by the new tax, you are likely limited to concessional superannuation contributions which should enable a tax deduction to be claimed. The tax saving from the contribution deduction is still worth accessing, even if the new tax is introduced as proposed.

We have been reconsidering using superannuation for some longer-term investments for clients who are likely to be impacted by the new tax and assuming it will be implemented. Investments that could not easily be unwound or transferred to another family entity if the new tax is introduced are the types of investments we are reviewing. If you are considering a similar investment through your superannuation fund and you would probably be caught by the new tax, we recommend discussing the investment further with us before finalising.  There may be an alternative structure that could produce a similar outcome on the assumption the new tax will proceed.

There may be opportunities to even up superannuation balances where one family member has more than $3m in superannuation and the spouse does not. Acting to even up superannuation balances if available is probably more critical than it has been previously. These options should be considered as part of year-end tax planning.

Proposed policy design

The proposed policy design is a new 15% tax directly on individuals based on the changes to their total superannuation balances during an income year to the extent that their balances exceed $3m at year end and adjusted for withdrawals and contributions.

The new tax will only apply to individuals with more than $3m in superannuation at the end of a financial year. As the measure is proposed to start from 1 July 2025, it will be the superannuation balance at 30 June 2026 that will matter initially.

Potentially, someone with a large superannuation balance during 2025/26 who withdraws their balance over $3m by 30 June 2026 will not be impacted based on our current understanding of the design intent.

New tax formula

The proposal is that the proportion of ‘earnings’ above $3m at the end of the financial year will be subject to the new 15% tax under the following formula:

(New) 𝑇𝑎𝑥 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑦 = 15 𝑝𝑒𝑟 𝑐𝑒𝑛𝑡 × 𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 × 𝑃𝑟𝑜𝑝𝑜𝑟𝑡𝑖𝑜𝑛 𝑜𝑓 𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠

The new 15% tax will be in addition to the tax paid on assessable income by the superannuation fund.

The new tax will be assessed to the individual by the ATO in the same way Division 293 tax is levied. The individual can then pay the tax personally or elect for their superannuation fund to pay.

Proportion of earnings calculation

The proportion of earnings above $3m at the end of the financial year subject to the new 15% tax will be calculated under the following formula:

𝑃𝑟𝑜𝑝𝑜𝑟𝑡𝑖𝑜𝑛 𝑜𝑓 𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 = Total Super Balance 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐹𝑖𝑛𝑎𝑛𝑐𝑖𝑎𝑙 𝑌𝑒𝑎𝑟 − $3 𝑚𝑖𝑙𝑙𝑖𝑜𝑛

Total Super Balance 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐹𝑖𝑛𝑎𝑛𝑐𝑖𝑎𝑙 𝑌𝑒𝑎𝑟

The proportion of earnings calculation increases reasonably quickly at higher balance levels. The table below shows the proportion of earnings that would be subject to the new 15% tax at various member balances at the end of a financial year.

Total Super Balance
Current Financial Year
Proportion
$3m 0%
$4m 25%
$5m 40%
$10m 70%
$50M 94%
$100m 97%

The ‘earnings’ component will simply be the movement in the total superannuation balance of the member for the year under the following formula:

𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 = Total Super Balance 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐹𝑖𝑛𝑎𝑛𝑐𝑖𝑎𝑙 𝑌𝑒𝑎𝑟 − Total Super Balance Previous 𝐹𝑖𝑛𝑎𝑛𝑐𝑖𝑎𝑙 𝑌𝑒𝑎𝑟 + Withdrawals – Net Contributions

This is where unrealised market value movements would be caught by the new tax as they would go through the member account balance and treated as earnings.

Negative earnings will not give rise to a refund. The policy design paper states losses can be carried forward and used as an offset in future years.

We have included examples from the Treasury information sheet below that shows how the new tax will apply.

Example 1

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, his tax liability for 2025-26 is:

15% × $500,000 × 33% = $24,750

Example 2

Carlos is 69 and retired. His SMSF has a superannuation balance of $9 million on 30 June 2025, which grows to $10 million on 30 June 2026. He draws down $150,000 during the year and makes no additional contributions to the fund.

This means Carlos’s calculated earnings are:

$10 million – $9 million + $150,000 = $1.15 million

His proportion of earnings corresponding to funds above $3 million is:

($10 million – $3 million) ÷ $10 million = 70%

Therefore, his tax liability for 2025-26 is:

15% × $1.15 million × 70% = $120,750

Conclusion

We expect the Government will continue to pursue the new tax and while there may be some changes to the policy design as currently known, we believe it is unlikely that the Government will change the broad intent or reach of the measure.

If you are concerned or would like to discuss your circumstances further, please contact us

This content is general commentary only and does not constitute advice. Before making any decision or taking any action in relation to the content, you should consult your professional advisor. To the maximum extent permitted by law, neither Pitcher Partners or its affiliated entities, nor any of our employees will be liable for any loss, damage, liability or claim whatsoever suffered or incurred arising directly or indirectly out of the use or reliance on the material contained in this content. Pitcher Partners is an association of independent firms. Pitcher Partners is a member of the global network of Baker Tilly International Limited, the members of which are separate and independent legal entities. Liability limited by a scheme approved under professional standards legislation.

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