Last week the Federal Government announced a future change to the taxation rules in relation to superannuation assets in Australia. The proposal is to increase the taxation rate that is applied to investment earnings within the superannuation environment from 15% to 30% on the component of an individual’s account balance that exceeds $3,000,000.
The proposed changes are not due to come into effect until the 2025/26 financial year (after the next Federal election) and it is estimated that the changes will raise approximately $2 billion in additional taxes over the four years from 2025 to 2029.
Treasury have indicated that this proposed tax change will impact approximately 0.5% of individuals with superannuation accounts across Australia.
It’s important to note that this measure is assessed based on an individual’s superannuation account balance exceeding $3,000,000, it’s not assessed on a per fund basis. Therefore, a couple could have up to $6,000,000 in a self-managed superannuation fund (assuming the individual account balances are evenly split) without being impacted by the proposed tax changes. The $3.0m threshold will include both an individual’s pension account balance (where earnings are taxed at 0%) and the accumulation account (where earnings are taxed at 15%).
The assessment of the additional tax will be based on superannuation account balances at the end of each financial year, therefore the first assessment date will be 30 June 2026.
For example, assume John has a superannuation account balance of $4.5m, only the proportion of the investment earnings on John’s balance between $3.0m and $4.5m (one third of his investment earnings) would be subject to the higher tax rate.
The additional tax will be administered via a separate taxation assessment which will apply directly to the individual instead of the actual superannuation fund. The individual will then have the option to either pay the tax personally or to arrange payment via their superannuation fund.
So, what’s the real ‘sting in the tail’ from this announcement?
Firstly, the $3.0m superannuation account balance threshold will not be indexed to the inflation rate each year. This effectively means that the $3.0m threshold declines in real value overtime. This will result in many more superannuation account balances being impacted by this proposed tax change. Especially, given the current trend of people staying in the workforce for longer and the Superannuation Guarantee (SG) contribution rate increasing to 12% by 2025/26.
Secondly, the actual amount subject to the additional tax will be calculated based on the ‘capital movement’ of an individual’s account balance over the financial year (as measured by a person’s Total Super Balance). It will NOT be based on the superannuation fund’s taxable investment income.
Therefore, the additional tax rate will apply to blanket earnings in the superannuation fund on assets above $3.0m. The definition of earnings will include investment income, realised capital gains and also unrealised capital gains. This will result in a tax on the capital growth of assets which have not actually been sold.
An adjustment will be made to take into consideration the addition of contributions or any pension payments deducted from an individual’s superannuation account during the financial year. However, this still means that a tax is being paid in advance (on unrealised capital gains) as an asset grows in value overtime.
The proposed tax changes may also require a rethink in relation to the following areas -
Superannuation estate planning strategies - for example in a situation where both members of a couple are individually under the $3.0m threshold, however upon death of the first spouse, the surviving spouse may then have a superannuation account balance that exceeds the $3.0m threshold.
Family business retirement plans – individual’s selling their family business close to or at retirement and making large non-concessional contributions into superannuation under the small business CGT lifetime caps.
Family Home Downsizing strategies - Older Australians planning to move to a smaller family home with the objective of “topping up” their superannuation balances in preparation for retirement by making further non-concessional contributions via the ‘downsizer’ contribution opportunity.
It’s important to note that this announcement is a proposal only at this stage. There will be a further period of consultation with the superannuation industry between now and the May 23 Federal Budget before any draft legislation is discussed in Parliament.
Despite this announcement Australia’s superannuation system still remains a tax effective structure to accumulate wealth for retirement over a long-term time horizon. Superannuation earnings are currently taxed at the concessional rate of 15% in accumulation mode and 0% in pension mode.
If you have any questions regarding the above, contact Director and Financial Adviser, Gary Dean at gdean@prosperity.com.au. Alternatively you may contact your Principal Adviser on 1300 795 515 to discuss.
This communication contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information. Prosperity Wealth Advisers (ABN 32 141 396 376) is an authorised representative of Prosperity Wealth Advisory Services Pty Ltd, Australian Financial Services Licensee (533675).
