Stephen Thaxter, Senior Partner, Sovereign Wealth Partners
The Federal Government is proposing an additional 15% tax on the income and growth of any individual’s total superannuation balance (including pensions) which exceeds $3m.
The proposal comes hot on the heels of the government’s new proposed objective of superannuation, which is “to preserve savings and deliver income for a dignified retirement, alongside government support, in an equitable and sustainable way.”
Having reached the conclusion that $3m plus balances enjoy generous tax breaks that are not sustainable, the government wishes to proceed with enabling legislation as soon practicable. It had already made an election promise to not change superannuation tax this term, so the new tax would commence from 1 July 2025, after the next federal election. It would be superannuation values at 30 June 2026 that would first become assessed against the $3m cap.
The new tax is expected to collect $2bn per annum initially and impact 80,000 Australians, representing just 0.5% of superannuation members today.
At this point there is only a broad outline available of the mechanics involved. Nevertheless, the media has plenty to argue about and there are some genuine concerns.
One is that currently there is no proposal to index the $3m threshold to inflation. This is a crucial point, as without an inflation adjustment more Australians would fall under the tax each year. Under reasonable assumptions a $3m balance at 30 June 2026 might well be reached by those with a $2.5m balance today, without any further contributions. And without inflation adjustments, younger contributing workers are impacted disproportionately. For example, the effective value of the $3m cap for current 25 year olds is equivalent to around $1m* in today’s terms.
Also, the intention is to tax unrealised gains in value, with no capital gains discounting. For Australia this is an unusual approach to income tax collection. As such, we may see the distortion of some new and creative approaches to superannuation valuations.
The simplicity of the proposed tax methodology will also inevitably lead to questions over payment of the additional 15% tax. Like the Division 293 excess contributions tax, it is proposed that the individual member can elect to pay the tax personally, or have it deducted from their superannuation fund balance. If the tax relates to unrealised gains, then clearly the tax assessment must be paid from other sources of income or liquidity. In addition, unrealised losses can only be carried forward to subsequent years and will not result in a tax refund.
It is still early days with this proposal, and we trust that the anomalies will be ironed out during the upcoming industry consultation period.
For now, it will be important to monitor developments and discuss them with your adviser. For example, in the current tax year, couples should carefully consider strategies such as contribution splitting. This may prevent the new tax from having a disproportionate impact.
*Source: Financial Services Council
