As the federal government moves to introduce an additional 15 per cent tax on superannuation earnings above $3 million (known as Division 296 tax), concerns and debates have emerged about the broader implications for investment strategies, retirement planning, and even the property market.
It is intended that once passed by Parliament, the new tax, which doubles the tax rate from 15 per cent to 30 per cent for balances that exceed $3 million, will apply from July 1, 2025.
The tax change is expected at inception to directly affect less than 0.5 per cent of investors or around 80,000 people.i
However, the $3 million threshold is not indexed and will progressively apply to more Australians as their fund balances rise. For younger Australians who may be two or three decades away from retiring, this is a tax trap. Inflation, contributions and growth in their superannuation assets will inevitably push them over the threshold.
Treasurer Jim Chalmers describes the increase as “a modest change” that will make “concessional treatment for people with very large superannuation balances still concessional but a little bit less so”.ii
If this tax increase is intended for people with large balances, why isn’t it indexed to protect ordinary Australians?
He says it will help fund other priorities such as Medicare, cost-of-living relief and tax cuts.
The Grattan Institute says tax breaks on super contributions cost the federal budget nearly $50 billion in lost revenue each year.iii
This is another erosion of the superannuation system that was set up in the 1990s to provide tax concessions for Australians to fund their retirement. Short-term funding issues are consistently the excuse for governments raising the tax on superannuation and removing concessions.
How will the rate be calculated?
The formula for the additional tax payment due calculates the difference between the member’s total superannuation balance for the current and previous financial years and adjusts for net contributions (which excludes contributions tax paid by the fund on behalf of the member) and withdrawals.
An earnings loss in a financial year, can be carried forward to reduce the tax liability in future years
The calculation of earnings includes all unrealised gains and losses. The taxing of unrealised gains is another concern for all investors.
The Grattan Institute says taxing capital gains as they increase removes incentives to “lock in” investments. “But it can create cash flow problems for some self-managed super fund (SMSF) members who hold assets such as business premises or a farm in their fund,” the Institute says.iv
Many commentators speculate there will be a major change to asset allocation in super, particularly in SMSFs, as a result of the move to tax unrealised gains.
Meanwhile, one property analyst predicts a structural shift in property investment with commercial real estate becoming more attractive because of its stronger income yields relative to capital growth.v
The new tax could also reduce the appeal of superannuation as a means to fund retirement given the restrictions on being able to access superannuation before reaching retirement and governments repeatedly reducing its tax benefits.
Navigating the changes
With the tax changes looming, we’re helping clients to ensure their portfolios will continue to meet their expectations.
For those looking to minimise their exposure to the tax, there are a number of strategies that may be useful.
These include:
- Diversifying investments outside of superannuation by, for example, making direct investments in equities, bonds or private businesses.
- Considering alternative retirement savings vehicles such as family trusts.
- Actively planning to optimise tax efficiency by, for example, structured withdrawals to keep balances below the $3 million threshold, making use of tax exemptions and considering asset reallocation.
The new tax marks a significant shift in Australia’s retirement savings landscape. While the government argues that the measure is modest and targeted, its long-term implications, particularly the taxation of unrealised gains and the threshold not being indexed, will reshape investment strategies for high-net-worth investors now, and increasingly more Australians.
For those nearing retirement with a high super balance, careful financial planning will be essential and all investors who could potentially be affected, should be reassessing their portfolios and weighing up whether alternate wealth management strategies may be an option.
Please get in touch if you would like help to navigate the changes.
i Better targeted superannuation concessions – factsheet (PDF)
ii Interview with Michelle Grattan, Politics podcast, The Conversation | Treasury Ministers
iii, iv Tax reform will make super fairer and the budget stronger – Grattan Institute
v $3 million superannuation tax change sparks property warning as ‘panic’ selling begins
