One modest change that affects less than 0.5% of all Australians

One modest change that affects less than 0.5% of all Australians

With these words the Treasurer (and also the Assistant Treasurer and Minister for Financial Services) advised that the Government will impose a special rate of earnings tax of 30% on earnings on super balances of $3m and above.  This change, the details of which are yet to be released, will apply from 1 July 2025.

The justification for this change, despite pre-election statements that there would be no adverse changes to superannuation, is a combination of the following:

• It is a modest change, as it only affects less than 0.5% of Australians
• It is necessary to better target super concessions and the revenue raised is required to reduce the budget deficit or to be used for worthy causes

The 30% rate is stated to be a “concessional rate of tax” which can only be the case if the rate is inclusive of the normal superannuation concessional rate of 15% – so the tax will be 15% for superannuation earnings on super balances above $3m in addition to the normal 15% tax on superannuation earnings (apart from earnings on assets supporting retirement phase pensions.)

This is a new and high rate of tax on superannuation earnings.  It is not a cap on the amount of savings in the superannuation system.  Consequently, there will be no requirement to withdraw from the super system any amount to reduce total super balances to be less than $3m (though many of those who are likely to be affected might do so).

Our initial thoughts on this modest proposal

Given the level of current Government expenditures the revenue to be raised by this proposal is not significant.

Generally, Governments over-estimate the revenue raised by tax changes, mainly because the affected individuals will change their behaviour.  One obvious response is to withdraw excess super balances from the system and place those balances in another vehicle (discretionary trusts) or invest those balances in another tax preferred investment (upgrade the family home or transfer money to children to upgrade their family homes).  Either less revenue will be raised or the Government will just encourage more investment in the family home and thereby raise house prices.

The proposal will be far more difficult to design and implement than first appears.  Primarily this will be because the proposal is based on aggregated super balances and it applies at a member level.  In general, it will not be possible to say that a particular super account is the “excess balance” account and so that account’s earnings should be subject to the 30% tax.  Consequently, all super earnings for a member will have to be aggregated and the proportion of those aggregated earnings which is excess will be determined by simple apportionment amongst all super accounts of the member.

Also, if the $3m figure includes pension balances, it could be that a portion of the pension account earnings will be subject to the 30% tax.

How the proposal will apply in the situation where the $3m cap is exceeded part way during a tax year or the total super balance falls below the $3m cap part way during a tax year will have to be determined.

It seems most likely that the 30% tax will be collected by the ATO determining which individuals have excess super balances and the amount of excess super earnings – and then collecting the 30% tax by release authorities issued to the super fund trustees.

Any alternative to the ATO identifying excess super earnings would involve either the member submitting excess super earnings tax returns.

Finally, how this proposal will deal with defined benefit interests (whether private sector or government sector) will have to be considered.

Enough of the small talk – what actions should be taken?

Between now and 1 July 2025, individuals who are likely to be adversely affected by the proposal may consider:

• Where one member of a couple has a transfer balance below $3m - as far as possible transfer the excess super balance by withdrawing amounts from super and recontributing those amounts as contributions to the low balance spouse
• Applying (so far as possible) small business concessions as super contributions for a spouse with the lower super balance
• Consider whether to reduce the individual's super balance and hold wealth in other vehicles such as discretionary trusts or investment companies, or to housing investment for themselves or their children – although in general withdrawing investments from super will be a one-way street (given their total super balances), any transfer of wealth out of the super system should be carefully considered.

In the longer term, this proposal will encourage couples to equalise total super balances by contribution splitting, spouse contributions and non-concessional contributions for the low balance member.

Finally… stay calm… the proposed start date of 1 July 2025 could be after the next Federal Election and who knows what may happen!