On 28 February the government confirmed the rumours that they are looking to increase the tax on members with super balances above $3 million from 15% to 30% from 1 July 2025.
Initially, the government was quite vague as to how this would work, but on 1 March they released a proposal with some more detail which has rocked even those high-net-worth individuals and retirees who thought the initial measure was a ‘fair compromise’.
The main shock is around how they plan to calculate ‘earnings’ on the portion of a member’s super above $3 million. These ‘earnings’ will include any market movement on the value of your benefits. So these are the unrealised gains on an asset you haven’t yet sold.
example of what happens once this tax increase is in place
Tony has $4 million in super at 30 June 2025. This balance grows to $4.5 million by 30 June 2026, through a mixture of actual income to the fund and market growth.
Tony will pay an extra 15% on the growth his fund has had during the 2026 financial year.
This growth is proportioned across the percentage of his fund that is over $3 million.
So $4.5 million -$3 million / $4.5 million = 33.33%
Therefore, Tony’s additional tax liability will be:
15% x $500,000 x 33% = $24,999
This tax liability will be issued to Tony as an individual [not his super fund], and he will then have the choice of applying to his super fund to pay this tax on his behalf or to pay it personally.
This is quite similar to the current Div 293 tax that high-income earners are charged on their contributions to super.
Effectively, this means that Tony has now paid 15% on the growth of an asset his super fund still owns.
This approach by the treasury is quite unusual as under normal tax rules you only pay tax on the growth of an asset after it has been sold.
so what happens when the market goes down?
As you all know, markets go up and down based on many factors. If you have a balance over $3 million in super and the market movement decreases you don’t get a refund of the tax you have already paid, but you do get to carry forward that earnings loss.
example of what happens when the market goes down
Tony has $4 million in super at 30 June 2025. This balance decreases to $3.5 million by 30 June 2026.
$3.5 million – $3 million/ $3.5 million = 14.28%
Therefore, Tony would get a carried forward earnings loss to put towards future earnings in the fund as follows:
$500,000 x 14.28% = $71,400
While this is some concession to allow a mechanism for a carried forward earnings loss, it Is far from ideal. Sometimes markets don’t come back to the same high level they were at previously so these losses can carry forward indefinitely, with Tony having already paid the tax.
our thoughts right now
These changes will get a very mixed response in the general market.
The government has been careful to stress that these changes only directly impact around 80,000 super members and with current contribution caps in place, many people will not be able to reach the $3 million balances in the future.
But I believe they have failed to recognise the various impacts this proposal has.
the potential impacts on high-net-worth individuals and retirees
- People with these levels of balances in their super fund have often already paid 30% tax on their concessional contributions before they went into their super.
- Alternatively, they have got this money via non-concessional contributions – so they have already paid 47% in tax.
- They are already paying 15% on the earnings of these accounts within their super fund now.
- Their adult children are likely to pay 17% on the death benefit payments when they leave the super system in the future.
- While a husband and wife can have $1.9 million each in a tax-free pension phase in retirement from 1 July 2023, in the event one of them dies, they are either going to be taxed at 30% on the earnings above the $3 million or look to exit it from the super system.
- It may mean that super funds with property and unlisted investment valuations are going to be more closely monitored by the tax office, as ‘earnings’ every year and now become crucial.
silver linings
- The proposal is exactly that, a proposal – and is not yet law. There will be lots of consultation on this proposal and how it is going to be implemented, so it is very unlikely it will go through in its current format.
- This proposal [unlike others that have been rumoured] does not force people to reduce their super balances to below $3 million, which would have been disastrous for a lot of people.
- We have some time to consider the strategies to put in place to help our high-net-worth and retiree clients. While 1 July 2025 will come around quickly, we have some time to restructure super for our clients that are impacted on a case-by-case basis.
The strategies we implement for clients will be different for everyone, as it will be unique to the member or their fund based on:
- what type of assets they hold in their fund,
- who is likely to inherit their super and in what form,
- what assets and taxes they are paying outside of super, and
- their age.
So while this announcement, isn’t ideal, we have time on our side and recommend that we wait for more clarity before making any big decisions.
we’re here to help!
If you have any questions or would like any help with your super, you can contact our team at oneplace@businessdepot.com.au or give us a buzz on 1300 BDEPOT.
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