What’s the fuss?
There has been a huge amount of coverage – as well as some scams – on what might happen on 1 July. Today we update you on the facts so you can better understand if super changes are relevant and if, therefore, some action will be required.
First up, what is NOT happening is a special one-off payment for those on an Age Pension. Nothing whatsoever is scheduled, but there is a scam doing the rounds that suggests you need to click a link to be eligible for this ‘extra’ payment. It’s not legitimate – if there were any changes to the Age Pension, we would report on the nature of these changes as well as how you can access them.
Separately, what is planned to start on 1 July is a higher tax on individuals with total superannuation balances over a threshold of $3 million. Many commentators are suggesting that this is a widespread tax that is destructive to super savings, future generations, estate planning and venture capital investment. The goal of Retirement Essentials is always to keep you informed, as opposed to promoting strong opinions on the rules governing retirement income. Today’s article will explain the context of the changes, who will be affected and how and when the new rules will apply. We’ll leave it to you to be the best judge as to the value of this proposed change.
What are the changes?
Currently those with funds in super in accumulation (or savings) mode are taxed at a maximum of 15% on earnings, regardless of the amount, though the actual amount of tax paid is often less than this after franking credits are applied. The new rules will see an additional 15% tax applied to the proportion of fund earnings attributable to balance above $3 million. So it’s important to note that the first $3 million in accumulation will continue to be taxed at 15%.
One controversial aspect of this increase is that ‘unrealised gains’ will also be taxed. So if, for instance the value of your super rose significantly in a given financial year, if your balance exceeds $3 million, the additional tax would apply, even though you didn’t actually sell and ‘realise’ this earning. Importantly, in years where there are unrealised capital losses, these can be ‘carried forward’ and potentially applied to future gains. As all fund earnings are potentially captured by the proposed new tax, it is a good time to review your mix of assets and to do some numbers on the possible impact on your super.
Who is most affected?
The new rules apply to balances higher than $3 million, which has been estimated to affect approximately 80,000 people, or less than 1% of all people with super accounts. Where the rules become controversial is that the amount of $3 million will not be indexed for inflation and wage increases. So in a few years’ time, it is likely this amount (of $3 million) will not be worth as much and there will be many more people who meet this threshold. So as the legislation has been written, the threshold will not move up over time. If it had been indexed to an inflation rate of, say, 2.5% it would be applied to those with more than $5 million in 20 years’ time, not $3 million.
Is it actually law?
Not yet. The legislation will be (re)introduced to both Houses of Parliament after it is reconvened with a new government at the end of July. Whilst the Albanese Government has a strong majority in the Lower House, this is not the case in the Senate and it will need support from the Greens or cross-benchers to make this law. It is possible, at this stage, that changes to the intended legislation will need to be made, including the level of the cap or indexation or both.
What should you do?
As mentioned above, less than 1% of those with super accounts will be affected if these changes do become law and tax is applied from 1 July. For those with balances near or above $3 million you may wish to consider how this tax may affect you and options you may consider on how you structure your overall super and non-super savings. But this should be part of an overall retirement income strategy. Given the magnitude of money involved, it would be wise to consult with an experienced adviser before making any changes.
Super just got more complex
Even if you are not affected by these changes, with not one, but two different levels of taxation means calculations on future balances just got way more complicated. If you find it difficult to reconcile the rules on super, private savings and/or government entitlements, there is help at hand. Retirement Essentials offers 55-minute guided Retirement Advice Consultations with an experienced adviser who can step you through the options associated with your super, regardless of how much you have and if you are in savings or pension phase.
Were you aware of these changes?
Do you have any concerns about the aspects of taxing unrealised gains and indexation?
