Proposed Super Tax Changes

The Government has now released draft legislation for public consultation in relation to the announced proposal to cap tax concessions on certain high balance super accounts from 1^st July 2025.

The draft legislation (referred to as Division 296 tax) largely reflects what was proposed by the Government in the initial announcement and subsequent materials released. Key takeouts from the draft legislation include:

Division 296 tax will not limit the total amount that a person can hold in total super interests, but rather it limits the tax concessions available on calculated earnings for high balance individuals.
There will not be legislative provision for indexation of the ‘large superannuation balance threshold’ which will be $3 million.
Division 296 tax will be levied at the individual. The tax can be paid personally, or an election made to have this amount released from super.
Division 296 tax associated with a defined benefit interest may be deferred.
Total super balance (TSB) will form the basis of the calculation of fund earnings for the new tax, and actual fund earnings will be disregarded for this purpose. In effect this means that unrealised capital gains will be treated as earnings and will impact the calculation of tax payable.
There will be some modifications to the definition of TSB, some of which will apply for all super purposes from 1 July 2025.

Current vs proposed taxation of accumulation phase.

Tax on earnings within accumulation phase is currently capped at 15% and there is no limit on the total amount that an individual can hold in accumulation phase.

Under the proposed changes:

Individuals with a TSB greater than the large superannuation threshold of $3 million at the end of a financial year (first tested on 30 June 2026), with calculated earnings for the year greater than nil, will be subject to Division 296 tax.
Division 296 tax will be levied at a rate of 15%.
additional tax will only be payable on the calculated earnings attributable to the portion of the balance that exceeds $3 million.
the $3 million threshold will not be automatically indexed based on legislative provision.
calculated earnings for this purpose will not reflect actual fund earnings but will instead be based on the individual’s TSB for this purpose, at the start and end of the year, after adjusting for certain contributions and withdrawals made.
if the individual has negative calculated earnings for a year, they may carry this forward to offset any additional tax which they become liable for in a future year.
existing capital gains tax concessions available to the super fund will not be impacted.
the additional tax will only apply to calculated earnings from the commencement date and not be applied retrospectively.
the additional tax will be able to be paid by the individual, or released from superannuation, and
Division 296 tax will be imposed separately to personal income tax, and cannot be reduced by personal deductions, offsets or losses.

Impact on advice strategies if legislated

From a tax perspective, the proposed additional 15% tax on calculated earnings may still make super an attractive investment option for high income earners who are currently paying tax at the top marginal rate of 47% (including Medicare levy). However, the relative longer-term tax effectiveness and appropriateness of superannuation strategies will need to be considered on a case-by-case basis. This may include high income individuals who may be impacted when the legislated stage three tax cuts take effect on 1 July 2024.

Other considerations may include:

maximising total super tax concessions available between members of a couple by considering the appropriateness of spouse contributions and/or spouse contribution splitting strategies.
the timing of withdrawals and contributions to super, given the way in which the calculated earnings formula will work (i.e., no accounting for the period of time amounts were in the fund).
cashflow considerations for impacted SMSFs, where both the fund and members personally may have restricted cashflow to pay additional tax (which may be due to the nature of the investments within the fund, and personal circumstances where for example these individuals are self-employed, own their business property within their fund and are asset rich but cash poor), and
consideration given to alternative tax and investment options, e.g.

family trusts
investment companies
investment bonds
other personally owned investments

Final Calibre comments

The proposed super tax changes have been widely criticised. Not because they will make people who are comfortably off pay more tax, but because of the way they have been worked out. There is still plenty of lobbying going on to revise some unpopular aspects of the draft legislation (e.g., the calculation of tax on unrealised capital gains).

Some people have asked whether they should consider taking large amounts out of super to ensure they get back down to the magic $3 million threshold. But the new tax isn’t due to start until 2025-26. It’s not law yet and there’s an election in the meantime. So, there’s no rush and plenty of time to wait and see for now.

Remember also that taking money out of an SMSF usually means selling assets the fund already owns. For people whose SMSF investments have already grown, that means paying capital gains tax “now” rather than some time in the future. The new tax applies only to growth in a member’s super account after July 1, 2025. So, selling assets that have already grown a lot now might be worse than just putting up with the new tax.

It’s also important to remember that whilst this new tax makes super less attractive than it is at the moment, it’s not necessarily going to be so unattractive that it’s worse than the alternatives. Super can still be a highly tax-effective place for retirement savings.

A range of advice opportunities may arise for higher super balance clients if the Bill becomes law. It will be important to review superannuation, other tax structures, investment and estate planning strategies to ensure they are appropriate for each client’s individual circumstances, objectives and needs.

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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.

Proposed Super Tax Changes