Changes to the taxation of superannuation
Changes to the taxation of superannuation
The Federal Government has released a draft bill containing measures announced earlier this year, which proposes changes to the taxation of individuals with superannuation balances in excess of $3 million.
The bill contains no change from the original proposal, including the controversial taxation of unrealised capital gains. This means that, if the bill is enacted by parliament into law, it will come into effect on 1 July 2025 (noting that the Federal opposition stated that, if the proposal becomes law, they will repeal it if they are re-elected at the next election).
While we do have some additional details regarding how this measure would work, including the exclusion of amounts borrowed by superannuation funds from the calculation of their members’ balances for these purposes, our stance remains that no immediate action by individuals is necessary, and may be premature. The bill does not change the current rules, which currently do not impose limits on the size of account balances during the accumulation phase.
What happens if the bill is passed?
It will introduce a new tax provision starting on 1 July 2025. Under this provision, an individual with a total superannuation balance (TSB) exceeding $3 million at the end of the prior financial year will be subject to an additional tax of 15 per cent (to be known as ‘Division 296 tax’) on the earnings of any balance that exceeds the $3 million threshold (to be known as ‘basic superannuation earnings’).
The initial assessment of superannuation balances will occur on 30 June 2026, and will be compared to an individual’s total superannuation balance as at 30 June 2025. The first notices of tax liability are expected to be issued in the 2026-27 financial year. This is an additional tax, meaning that the current rules for taxing earnings in superannuation funds remain unchanged. As a result, it is possible that all earnings would be taxed at the ‘standard’ rate of 15 per cent, plus an additional 15 per cent for the proportion of earnings derived by capital amounts that exceed $3 million, giving a new ‘headline’ tax rate of 30 per cent for those impacted.
The $3 million threshold is not indexed. This means that a greater number of individuals will be subject to the additional tax as time progresses and asset values rise.
How will tax liabilities be calculated for individuals?
In this context, ‘earnings’ are defined as the difference in an individual’s total superannuation balance at the start and end of the relevant financial year, considering withdrawals and contributions, regardless of whether any capital gains are realised through asset disposal. As these earnings include both real and notional gains, they do not necessarily represent only physical receipts. The proportion of earnings corresponding to capital amounts exceeding $3 million is then calculated. If there are negative earnings, they can be carried forward and offset against any future notional gains (‘unapplied transferrable negative superannuation earnings').
If a tax liability arises for an individual, they will have the choice of either paying it from their own non-superannuation resources or from their superannuation savings (by electing which superannuation accounts and in what proportions, if they have multiple).
The following example provided in the bill’s explanatory memorandum helps illustrate how the additional tax liability arises and is calculated accordingly.
Jess has a TSB of $4 million on 30 June 2025, and $4.5 million at 30 June 2026.
Jess receives concessional superannuation contributions of $27,500 in the 2025‑26 income year, including $9,500 in salary sacrifice contributions.
For these purposes, her total contributions for the year are $23,375, after correcting for the 15 per cent tax paid by her superannuation fund on these concessional contributions.
Jess’s adjusted TSB at the end of the year is calculated to be $4,476,625, by deducting her total contributions of $23,375 from her end of year TSB of $4.5 million.
Jess’s basic superannuation earnings in the 2025-26 income year are calculated as $476,625, by subtracting her previous TSB from her adjusted current TSB (i.e., $4,476,625 - $4 million).
As Jess does not have unapplied transferrable negative superannuation earnings, her superannuation earnings for the 2025-26 income year will be her $476,625 in basic superannuation earnings.
As her TSB at the end of the year is greater than the large superannuation balance threshold of $3 million and her superannuation earnings for 2025‑26 are greater than nil, Jess will have taxable superannuation earnings for Division 296 tax purposes.
The percentage of Jess’s superannuation earnings above the $3 million threshold is calculated as 33.33 per cent, by calculating the percentage of her TSB at the end of the year over $3 million rounded to 2 decimal places (i.e., $4.5 million - $3 million)/$4.5 million).
Jess’s taxable superannuation earnings for Division 296 tax are calculated as $158,859, by multiplying her superannuation earnings by the percentage of the earnings above the threshold (i.e., 33.33 per cent x $476,625).
This taxable superannuation earnings amount will be taxable at 15 per cent. Jess will have a Division 296 tax liability of $23,829 for the 2025-26 income year (i.e. $158,859 x 15 per cent).
As always, we recommend that individuals obtain professional advice relevant to their personal objectives and outcomes, some of which could include:
- The management of capital growth in the superannuation environment
- The transferral of wealth away from the superannuation environment.
Although immediate action may be premature and unnecessary, it is important to thoroughly understand this bill, assess its potential impact, and start considering how you would respond if it were enacted.
BDO’s superannuation advisers can assist with assessing the impact on your personal circumstances, including:
- Calculating your current and projected total superannuation balance
- Calculating the taxation outcomes associated with certain future scenarios, including the restructuring of your wealth in and outside the superannuation environment.
If you want to understand the implications of this proposal in greater detail, please contact your local BDO superannuation adviser.
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