The Australian government has proposed new legislation for consultation that would impose a tax on high-income earners with large super balances. The draft legislation is part of the government’s efforts to address the issue of rising income inequality and to ensure that high-income earners contribute their fair share of taxes.
The proposed tax would affect superannuation fund earnings for members whose total superannuation balance is above $3 million. If you fall into this category, here we share what you need to know.
Proposed tax details
According to the draft legislation, a 30% tax will be imposed on member accounts with a Total Superannuation Balance (TSB) above $3 million.
Individuals with balances over this threshold would need to pay an additional tax of 15% on the earnings on any balance that exceeds $3 million. This change brings the headline tax rate on earnings to 30%.
The tax will take effect from 1 July 2025 and apply to the 2025-26 financial year onwards so it’s the balance in super on 30 June 2026 that will be considered initially. Therefore, someone with a substantial super fund in 2025/26 who withdraws everything over $3 million in June 2026 will not be affected.
Earnings are calculated by looking at the difference in TSB at the start and end of the financial year, adjusting for withdrawals and contributions. Negative earnings can be carried forward and offset against this tax in future years’ tax liabilities. Individuals can choose to pay this tax out-of-pocket or from their superannuation funds. This tax will be separate to an individual’s personal income tax.
Who will the tax impact?
The proposed tax impacts individuals with a TSB above $3 million. The $3 million cap includes all a member’s super, including both their pension and accumulation accounts combined. It is not limited to just their accumulation accounts.
It is worth noting that the $3 million threshold applies per person, not per fund. This means a couple could still have $6 million in super before being impacted, as long as the balance is split evenly between them, and neither goes over $3 million.
The limit will not be indexed for inflation and will remain the same until the government reviews and changes it in the future. It’s therefore significant to note that the threshold will be worth much less than $3 million today, capturing a lot more people who may not consider themselves particularly wealthy.
What should I be doing now?
As the proposed tax on super balances above $3 million is expected to take effect from 1 July 2025, superannuation fund members with balances above this threshold may want to start considering their options to prepare for the new regime. Some options that members may want to consider include:
- Assessing liquidity and ability to meet tax liabilities: Individuals should evaluate their liquidity and ability to meet tax liabilities under the proposed new regime. This may involve reviewing personal funds or liquid funds in their superannuation account to ensure they can meet their tax obligations. However, for individuals with illiquid investments in private entities, this may be challenging.
- Exploring options to reduce super balance: Individuals may also want to explore options to reduce their TSB below $3 million. This decision should take into account estate planning requirements, conditions for release, the ability to split and reallocate balances between spouses, tax on death benefits, preferred alternative investment vehicles, and a careful consideration of the impact of moving assets and funds outside of the superannuation system (and whether the alternative is appropriate for both commercial and taxation purposes).
The proposed legislation is still subject to consultation and may be subject to changes before it is finalsied. However, it signals the government’s commitment to reforming the superannuation system and ensuring that it remains sustainable. The proposed tax on super balances above $3 million is just one of the many changes that the government is considering to improve the system and ensure that it benefits all Australians.
Individuals with balances above $3 million may want to take proactive steps to prepare by assessing liquidity and minimising your total superannuation balance. As always, we recommend professional advice to optimise your tax position and ensure that strategies they adopt comply with the superannuation and tax laws. Speak to Acceler Advisory on how we can help you minimise the potential impact on your retirement savings.