The Federal Government is seeking to increase the tax on super balances over $3 million. Here are some of the possible issues with the super tax, as well some observations based on client discussions with SMSF trustees.
Brief recap of the proposal
- If passed, the changes will apply for the 2026 financial year, commencing 1 July 2025. The details still need to be developed and legislation drafted.
- The changes will apply to individuals (not superannuation funds) with a Total Super Balance (from all their super funds) in excess of $3 million on 30 June 2026.
- A new tax of 15% will be levied on the 'earnings' derived from their TSB above $3 million. This will be in addition to current superannuation income tax rate of 15%, applying to the whole of fund earnings.
- Unrealised capital gains ('earnings') will be taxed in a radical change in a tax system that currently only applies tax on income received and realised gains from the sale of asset.
- Unrealised losses can be carried forward, but will not result in a tax refund.
- The individual can elect for their superannuation fund pay the tax. The tax collection mechanism will be similar to the collection of Division 293 tax on concessional superannuation contributions for high income earners.
Possible issues and ramifications of the new tax
Anyone impacted by the changes will need to assess the benefit of holding more than $3 million in superannuation and whether it would be more tax effective to invest the excess in other tax entities, especially other vehicles that don’t tax earnings on an accruals basis.
There remains a question, however, whether members who are not yet retired, or who have not met a condition of release to access their superannuation benefits, will be able to move their excess balance out of super.
The $3 million threshold and tax applicable is tested only at year end which may be unfair when fund asset values fluctuate throughout the year.
The new tax is levied on individual superannuation balances and not couples or families. A couple can avoid the tax if the total of their combined TSB is under $6 million and neither of them individually exceeds $3 million. Whereas where one partner has say $5 million in super and their partner has zero superannuation, then the new tax would apply.
It will encourage family tax planning strategies by building up the superannuation balance of family members who are below the $3 million threshold and reducing balances of family members above the $3 million threshold, perhaps via recontribution strategies or contribution splitting.
Asset allocation in superannuation funds may also be affected. It may discourage investment in high growth (but low or no income yielding) investments and illiquid assets such as real property.. Some members may not hold enough cash to the pay the tax, which means the tax may be paid by the member personally.
Elderly people may consider taking out all their superannuation above $3 million to avoid the extra tax, as well as addressing the possibility of the superannuation death benefits tax of up to 17% earlier than otherwise.
Observations from SMSF clients
Clients are generally accepting of tax reform on superannuation provided it is fair and not retrospective and they are not forced to take out superannuation that is already in the system. The proposed changes seem to achieve that.
However many clients have complained about the way the new tax is calculated, in particular basing the tax on a $3 million cap at year end and the calculation of taxable income based on unrealised earnings.
We are already seeing clients reconsider whether to hold illiquid assets, such as property, in their SMSF, especially where the investment would rely heavily on capital gains rather than income for its returns.
Many clients opt for an SMSF to invest in unlisted, private or closely-held investments such as private equity or business real property. They usually cannot invest their superannuation in these type of assets through other superannuation vehicles such as public funds.
These SMSF clients are thinking these assets may be better sitting in another type of entity. Property and private equity may be removed from super where there are no liquidity events.
Overall, clients are talking about a re-allocation of capital to more income-producing, or high-yielding and possibly higher risk assets in superannuation in order to have the liquidity to pay the new tax.
Where to from here?
The client process on the proposed new tax has to date focused on education as opposed to immediate responsive action.
We are telling clients not to panic because we have not seen the full details yet. There may be changes after the consultation process. Clients may commence minor planning but we’re telling them not to over plan as commencement is two years from now.
But it is clear that the new tax will encourage those with more than $3 million in superannuation to look at ways to reduce their superannuation benefits. It will also discourage those with less than $3 million to grow their superannuation balance to more than the new tax threshold.
Andrew Yee is Director of Wealth Management at HLB Mann Judd, Sydney. This article is general information and does not consider the circumstances of any individual.