The new superannuation tax and what it means
The new superannuation tax will start on 1 July 2025 and relates to the portion of an individual’s super balance above $3 million.
In this article we explain the details of the new tax what it means to individuals with more than $3 million in their super funds.
The adjustments to the taxation of super for high-income individuals aim to align it more closely with the corporate rate, even though it remains considerably lower than the top marginal tax rate of 45%. However, the complexity of the new tax system is evident in the draft legislation.
Contrary to recent speculation, there is no suggestion from the government that it is considering imposing a cap on superannuation balances.
Additionally, the government’s proposal maintains the existing concessional tax rate on contributions to super accounts made by employers or individuals before tax.
A more contentious aspect of the proposal is Treasurer Chalmers’ decision not to index the $3 million threshold for the higher tax rates. This means that as super balances increase over time, more individuals will surpass the threshold, potentially facing higher tax rates on their superannuation.
The changes in a nutshell
The tax measure, formally named Division 296 tax, is set to impact individuals with total superannuation balances (TSBs) exceeding $3 million at the close of a financial year.
In contrast to the government’s initial announcement, it does not entail doubling the super earnings tax.
Instead, it introduces an entirely new tax, targeting the freshly defined concept of ‘earnings’ at a 15% rate.
The current 15% tax on earnings for accounts in the accumulation phase (excluding untaxed constitutionally protected funds) will apply solely to the fund’s taxable income, encompassing dividends, rent, realised capital gains, interest and similar sources.
Considering capital gains discounts, franking credits and other deductions, the effective internal tax rate for APRA-regulated funds averages around 7%.
Imposing a distinct tax rate on the assets of significant funds supporting members with TSBs over $3 million would be impractical. The Division 296 tax serves as a compromise solution. Unlike the existing earnings tax, it does not apply to the fund’s taxable income. Instead, it targets a portion of the affected individual’s account balance change.
This tax is limited to earnings linked to the portion of an individual’s account balance exceeding $3 million. Consequently, if your balance slightly surpasses the threshold, only a proportionate share of your earnings will be subject to additional tax.
Outlined below are the critical aspects of the proposed changes:
Effective date: The tax will apply to future earnings starting from the financial year 2025–26, with non-retrospective application.
Taxable base: The tax pertains to earnings generated from investments within your super accounts, excluding net contributions.
Account size limit: There will be no prescribed limit on the size of super account balances.
Threshold indexing: Initially, the $3 million threshold will not undergo indexing. Consequently, an increasing number of individuals may be subject to the 30% tax rate over time as their super balances grow.
Individual application: The $3 million threshold is applicable individually. Therefore, couples could possess up to $6 million in combined super balances without incurring additional tax liabilities.
So, what are your taxable earnings?
When determining earnings, the calculation involves subtracting your TSB from the prior year’s 30th of June from your most recent 30th of June TSB. Subsequently, the net contributions made during the year are subtracted, and any withdrawals are added back.
This outcome reflects the change in your balance attributable to investment growth, encompassing the capital growth of unsold assets, including unrealised capital gains.
It’s crucial to note that this definition significantly differs from what constitutes the taxable income of a super fund. Division 296 introduces not merely an alteration to the existing super earnings tax but rather an entirely novel policy.
The draft legislation, unveiled in early October, provides additional insights into the definition of earnings. Notably, if your TSB was below $3 million at the most recent or the previous 30th of June, the calculation is adjusted to exclude earnings or losses not tied to a balance exceeding the threshold.
Despite industry apprehension following the initial announcement, all withdrawals and contributions have been considered. This encompasses family law splits, spouse contribution splits, transfers of super from a deceased partner, and death/TPD insurance payouts. This recognition acknowledges that these amounts do not constitute earnings and should not be subject to taxation.
In addition, although it’s impossible to reclaim taxes paid on unrealised capital gains, a mechanism exists to carry forward losses. If the outcome of the annual earnings calculation yields a negative result, this loss can be utilised to offset taxable earnings in subsequent years.
There are exemptions
Individuals who have received a structured settlement contribution, those who passed away before the last day of the income year, or child recipients of death benefit pensions will not be subject to the new tax.
Earnings from constitutionally protected (untaxed) funds for state higher level office holders, earnings from the super of sitting Justices of the High Court appointed before 1 July 2025 and earnings from non-complying funds will be exempt from tax.
However, the balances of these accounts will be factored in when assessing whether you have reached the $3 million cap.
This allows for applying tax to the earnings of other superannuation interests held by the same individual.
What it means for retirees
Retirees can transfer up to $1.9 million (the transfer balance cap) from their accumulation accounts into retirement phase pension accounts. Investment earnings on retirement phase accounts are tax free and this will not change.
However, the value of these accounts is included in your TSB and counts towards the $3 million threshold for calculating Division 296 tax.
Retirees with a total balance (including retirement and accumulation phase interests) above $3 million will therefore be affected by Division 296 tax in the same way as anyone else.
North Advisory Wealth helps individuals grow and protect their wealth.
We aim to provide individuals with answers and advice supporting their long-term wealth goals, including the best way to navigate this changing tax law to superannuation funds.
Contact us if you ever need clarification or assistance. We offer our clients professional, qualified financial advice and business tax services.
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