Proposed Super Tax Changes

Summary of the proposal

The Federal Government recently proposed an additional 15% tax on earnings and capital gains for superannuation balances above $3 million. If the legislation passes, it’s expected to take effect from 1 July 2025 and is projected to affect 80,000 Australians.

Under current rules, the most tax an individual would pay on superannuation earnings is 15%. Individuals impacted by the changes could pay as much as 30% tax on their superannuation earnings and capital gains.

For example, say ‘Andrew’ has $5.5 million in super by 30 June 2025.

• His balance grows to $6 million by 30 June 2026 with investment earnings and unrealised capital gains.
• Andrew makes no contributions or withdrawals during the year. Therefore, his calculated earnings are $500,000.
• As 50% of Andrew’s account balance is over $3 million, 50% of the calculated earnings ($250,000) will be taxed an extra 15%.
• This would result in an extra $37,500 in tax, which Andrew could pay personally or from his super fund.

It’s essential to highlight that unrealised capital gains also count as earnings for the purposes of this cap. This may create an issue if the super fund has insufficient liquidity to pay the tax bill, which may require a sell-down of assets or the tax bill being paid personally.

The other issue is that it is unclear at this stage how the government will treat defined benefit pensions. We do know that the $3 million is assessed based on total super balance, which could mean a special value (lump sum) is assigned to defined benefit pensions, like the transfer balance cap legislation. This is an area to watch closely.

Start planning now

For couples, this proposal emphasises the importance of equalising super balances.

Take ‘David and Mary’, for example.

• David has $4 million in super, so 25% of his super investment earnings will be taxed at a maximum of 30%.
• Mary has only $1 million in super.
• Suppose David worked with his wife to implement various rebalancing strategies across multiple financial years. They may get David’s balance below $3 million and Mary’s to $2 million.
• Effectively, their efforts could allow them to have all their superannuation investment earnings taxed up to 15%.

‘Even if your super balance is currently under $3 million, consider how investment earnings and contributions over the next few years could propel your balance above this mark.’

Longer-term considerations

While few individuals have super balances over $3 million, if one member of a couple passes away, the surviving spouse’s resulting super balance may easily tip over.

Take ‘Sue’, for example.

• Sue has $1.7 million in super accumulation.
• She recently received a death benefit income stream from her late husband with a balance of $1.5 million.
• Now, she has a total super balance of $3.2 million, meaning some of her superannuation earnings will be taxed at 30%.
• While Sue cannot rebalance her superannuation, there are other options she could consider. For example, she may benefit by withdrawing some of her super and investing it personally or in another entity (such as a trust), provided the tax rate is less than 30%.

The potential long-term tax savings may be significant enough to outweigh any additional costs or complexities associated with these arrangements. In other words, it’s worth exploring these strategies now.

Seek specialised super advice

The restrictions on contribution caps mean rebalancing strategies may need to be implemented over multiple consecutive financial years. This means that even younger people can benefit from planning early. Read more about planning rebalancing strategies here.

With contribution limits expected to change, careful planning and expert super advice can help optimise the long-term savings of super equalising strategies.

These changes may also prompt those in similar circumstances to Sue to ensure binding nominations and overall estate plans are structured to maximise beneficiary outcomes.

Talk to your adviser if you’d like to know how these proposals may impact you and how you could benefit by taking action now.