The new superannuation tax and what it means

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.

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.

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.

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.