BDO’s Superannuation advisers explore the proposed changes to the taxation of superannuation balances exceeding $3 million.
The Federal Government has proposed changes to the taxation for individuals with balances in excess of $3 million.
This is a proposal at present, and no laws or regulations have changed as of 9 March 2023. Due to its sensitivity (not the least of which is the taxation of unrealised capital gains), there is a strong likelihood that numerous alterations to the proposed changes may be applied before they come into effect on 1 July 2025 as scheduled. The Federal Opposition has stated that, if the proposal becomes law, they will repeal it if they come to power at the next federal election.
Although a fact sheet has been released by the Treasury explaining the proposal, it contains very limited details. As a result, no immediate action by individuals is necessary and may be premature. Certainly, the proposal does not change the current rules, which do not limit the size of account balances in the accumulation phase.
What are the proposed changes to high-value superannuation balances?
The proposal suggests that from 1 July 2025, an individual with a total superannuation balance exceeding $3 million at the end of the prior financial year will be subject to an additional tax of 15 per cent on the proportion of earnings on any balance that exceeds the $3 million threshold. The first time that superannuation balances will be tested will be on 30 June 2026 and will be compared to an individual’s total superannuation balance on 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.
For these purposes, ‘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. These earnings are notional gains and do not represent any 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.
How will tax liabilities be calculated for individuals?
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 by Treasury helps illustrate how the additional tax liability arises and is calculated:
Warren is 52 with $4 million in superannuation at 30 June 2025. He makes no contributions or withdrawals. By 30 June 2026, his balance has grown to $4.5 million. Warren’s earnings are $500,000($4.5 million - $4 million). His proportion of earnings corresponding to funds above $3 million is 33 per cent ($4.5m - $3m) ÷ $4.5m. Therefore, Warren’s additional tax liability for 2025-26 is $24,750 (15% × $500,000 × 33%).
When should you seek help?
If more details emerge, or the proposal is amended, individuals should seek 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 prudent to thoroughly understand this proposal, assess its potential impact, and start considering how you would respond if it were implemented.
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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