As reported last week, in a surprise announcement on Monday 13 October, the Treasurer Jim Chalmers announced major changes to his ‘signature’ superannuation legislation.
There are three key elements which have now been altered:
- The proposed extra 15% tax on earnings on super balances over $3-million (i.e. to move to 30% tax) has been modified. The threshold amount of $3 million will now be indexed to inflation.
- A second level of taxation – 40% – will be applied to earnings on super balances over $10 million.
- These higher tax levels will no longer be applied to unrealised capital gains.
Are you likely to be affected by these changes? Let’s start at the beginning, with the original legislation to increase taxes on super, first mooted by the Treasurer more than two years ago. After much canvassing of opinion, the decision was taken to double the tax on super earnings (currently 15%) for those with balances in their super $3 million and higher.
Whilst this was relatively straightforward, if unpalatable for the 90,000 (or 0.5%) of Australians who would have been affected, the legislation became very complicated, very quickly. That’s because of two provisions:
- The decision to include unrealised gains in the higher tax rate. This means, for instance, someone with a property held by their fund, with an increase in value of the property of, say $60,000, would be required to pay 30% tax on this gain, even though, unless the property was actually sold, the amount was not ‘realised’. This would have meant many fund members would have had to come up with extra money to cover amounts they had not actually received.
- The contentious decision to set in stone the threshold of $3 million. This led to widespread concern that, without indexation of this cap, over time more and more Australians would be drawn into a much higher super tax regime
So no surprises for guessing that it is these two aspects of the super legislation which have now been withdrawn. And that the higher tax level now introduced (40% on earnings of funds larger than $10 million) will affect so few retirees that there is unlikely to be much resistance at all.
There was a mixed reaction to the announcement of the changes. The Albanese Government will depend upon support from the Greens and the Opposition to steer the bill through both Houses of Parliament, so it is far from a done deal. The legislation is not likely to be introduced until early next year, and not due to be enacted before 1 July 2027. So there’s a way to go.
However! Planning ahead for such major changes is always the best response to changes in the rules of retirement income. Retirement Essentials Head of Advice, David Kennedy shares the following explanation of how these rules will apply:
Further detail on the specifics of implementation won’t be available until the legislation is passed, potentially late 2025 or early 2026. But for now we can safely assume there is:
- 1 July 2026 commencement with first assessment taken on 30 June 2027 and tax payable based on earnings in FY2026-27.
- Two thresholds ($3m and $10m) which relate to an individual’s Total Super Balance (TSB) including accumulation and decumulation accounts (Account Based Pension) values
- Thresholds will be indexed, but not annually. They will move up in increments of $150,000 for the $3 million threshold and $500,000 for the $10 million, in a similar way to the indexation of the Transfer Balance Cap (TBC).
- Additional tax of 15% (30% in total) on earnings will be generated on the proportion of the TSB above $3 million.
- Additional tax of 25% (40% in total) on earnings will be generated on the proportion of the TSB above $10 million.
- People can choose to pay the tax from their super fund or from personal assets
What about Joe?
Sometimes it’s easiest to understand rules when we see them in action in an individual situation. We asked Retirement Essentials adviser, Andrew Dunkerley with a question from Joe who has $3.1 million in his super fund, just over the new threshold. He was tossing around ideas of ways to use the excess $100,000 so he wouldn’t be caught out by the higher, 30% tax on his earnings from this amount. Andrew considered a few options including a change in investment mix, a transfer to Joe’s wife’s super, or simply withdrawing the amount over the new threshold. The ramifications vary, so keep an eye out next week for Andrew’s detailed analysis of the different options at Joe’s disposal.
And lastly, remember…
…with the proposed changes in super taxation, the tax is levied on earnings, not the balance. So whilst a 30% tax take on balances over $3 million may affect you, the 30% will only apply to those earnings on the balances in excess of the first $3 million.
What’s your view?
Do you agree with these modifications?
Or do you think, given the small number of retirees affected, it doesn’t matter much at all?
Finding rules on super just to hard to handle?
You’re not alone. It’s not just what you can do with your super that’s important – it’s also how super combines with the Age Pension that can seem unnecessarily complicated. If you feel a tailored Retirement Advice Consultation which steps you through the rules about your super and your retirement income needs would be helpful, please don’t hesitate to contact Retirement Essentials to learn more.
