Government proposes higher taxes for super balances exceeding $3m

The Government has announced its intention to cap tax concessions on certain higher balance super accounts from 1^st July 2025. If legislated, clients with higher balances may need to review a range of possible super, investment, tax and estate planning strategies to restructure their affairs depending on their individual and family circumstances.

While its important to understand that this is just a proposal at this time, Calibre understands that many clients may have questions about whether the proposal could apply to them and what they may need to consider.

By postponing the effective date until after the next Federal election, due by May 2025, Labor can claim it took the policy to the people, thereby not breaking an election commitment. Treasurer Jim Chalmers will argue he has addressed some of the growing costs of superannuation concessions. On the other hand, those affected have three more tax returns at the lower rate assuming Labor wins again.

It’s worth noting there are many assumptions in the $48 billion estimated cost of superannuation concessions, such as the guess that earnings outside super would be taxed at the top marginal rate, whereas it is more likely that many people would find alternative ways to reduce their tax.

The new policy is expected to raise about $2 billion a year. Earlier in the debate, Chalmers suggested he preferred a cap of $3 million on the amount that can be held within super, with the rest removed. He probably wanted to avoid the spectre of increasing taxes, but it would have been an inferior approach. Imposing a $3 million cap would have required the removal of money from superannuation, creating a range of complexities such as forced sales of illiquid assets and realising capital gains in a tax event.

A Summary of the Proposal

1. The tax rate on earnings on superannuation balances greater than $3m increases to 30%, from 15%.
2. The $3m will not be indexed.
3. The $3m refers to an individual member’s balance, not of an entire superannuation fund.
4. There would be three tax rates for earnings in superannuation:

5. The 30% tax will include Capital Gains Tax (CGT) on realised and unrealised capital gains. This could pose difficulties for large balance funds with illiquid assets.
6. The current 15% tax-band will retain the 1/3rd CGT discount for securities sold more than 12 months after purchase.
7. Negative earnings in a year can be carried forward.
8. Proposed Commencement: 1 July 2025.

Who will be impacted?

The measure is limited to those individuals who have more than $3m in super at the end of a financial year. Since it’s not due to start until 2025/26, it’s the balance in super at 30 June 2026 that matters initially. Presumably, someone with an enormous super fund in 2025/26 who withdraws everything over $3m in June 2026 will not be impacted.

And note that it’s $3m per person, not per fund. That means a couple could still have nearly $6m in super before being impacted, as long as it’s split evenly between them and neither goes over $3m.

The $3m includes all of a member’s super, i.e., both their pension and accumulation accounts combined. It’s not restricted to just their accumulation accounts. It also includes any Defined Benefit super and pension accounts.

The $3m won’t be indexed – so it won’t increase with inflation each year. Clearly in a few years, this will be worth a lot less than $3m today, capturing a lot more people who may not feel that they are particularly wealthy. Whilst the government estimates only about 80,000 people will be affected, this number will climb into the hundreds of thousands in the long term due to the fact that, under the proposals, this $3m limit will not be indexed to inflation.

Should you make any changes now to your wealth accumulation strategy and is superannuation still worthwhile?

Importantly, this measure is a proposal only and has not been made law. The government has stated that they intend to consult further on this proposal, and additional changes are possible. As such, whilst it may be useful to contact us to find out if the proposal may impact you and your family, there is no requirement to consider making any changes to your wealth accumulation strategy until such time as it has been made law.

For people with individual member super balances under $3m, superannuation will continue to be a highly tax-effective wealth creation strategy with concessional tax rates ranging between 0% to 15%.

For people with super balances over $3m, the proposed 30% tax on a portion of the fund’s earnings may still make super an attractive investment option, particularly for higher income earners who are currently paying tax at the top marginal rate of 47% (including Medicare levy).

There are also other potential benefits to super, aside from the concessional rate of tax on earnings.

What are the alternatives for impacted clients if this proposal is legislated?

If the proposal becomes law, it will be important for impacted clients to review and possibly restructure their current super, investment, tax and estate planning strategies depending on their individual and family circumstances.

The strategy considerations for impacted higher wealth client may include:

• Maximising total super tax concessions available between members of a couple and/or spouse contribution splitting strategies.
• The timing of withdrawals from super, given the way in which earnings are to be calculated.
• Exploring the merits of other tax structures like holding assets in personal names, family trusts, companies and investment bonds, all within which wealth can be accumulated.
• Exploring other intergenerational wealth transfer strategies like helping to contribute to your children’s super or the bringing forward an inheritance (by way of a loan agreement).
• Making changes to the superfund’s investment strategy to improve the potential tax outcomes and/or cashflow in order to fund any additional tax.

Conclusion

Calibre Private Wealth Advisers serve the needs of successful individuals, business owners, and family groups who often have relatively complex financial circumstances. We specialise in complex advice needs spanning a variety of tax structures.

Please contact us if you wish to confidentially discuss your specific circumstances or would like more information about how this proposal could apply to you if it becomes law, to ensure the strategies you have in place are right for you and your family.

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If you have any questions/thoughts in relation to this article or have a need for some advice and would like to discuss your particular situation, please contact Gordon Thoms or David Conte at Calibre Private Wealth Advisers on ph. (03) 9824 2777 or email us here.

The information contained in this article is of a general nature only and may not take into account your particular objectives, financial situation or needs. Accordingly, the information should not be used, relied upon or treated as a substitute for personal financial advice. While all care has been taken in the preparation of this article, no warranty is given in respect of the information provided and accordingly, neither Calibre Private Wealth Advisers, its employees or agents shall be liable for any loss (howsoever arising) with respect to decisions or actions taken as a result of you acting upon such information.