Government consults on $3m super tax legislation

Under the draft legislation, which was put up for consultation on Tuesday, the tax rate on earnings from total super balances (TSB) above $3 million will double to 30 per cent, while earnings on super balances below $3 million will continue to be taxed at 15 per cent.

“The bills reduce the tax concessions by imposing a tax of 15 per cent on certain earnings based on the percentage of the TSB exceeding the $3 million threshold,” the government said in explanatory materials accompanying the draft legislation.

“The tax is imposed directly on the individual and is separate from the tax arrangements of the superannuation fund or scheme.”

The changes are set to take effect from the 2025–26 financial year and were originally unveiled by the Treasurer in February before being included in the federal budget in May.

Around 80,000 people, or approximately 0.5 per cent of Australians with a super account in the 2025–26 income year, are expected to be impacted.

According to the budget, the measure is estimated to increase receipts by $950.0 million and increase payments by $47.6 million over five years from 2022–23. In 2027–28, the first full year of receipts collection, the measure is expected to increase receipts by $2.3 billion.

In the explanatory materials, the government said that it was making Australia’s super system “more sustainable and fairer through a modest change to ensure generous superannuation tax breaks are better targeted”.

Additionally, the government suggested that the changes are consistent with its proposed objective of superannuation “to preserve savings to deliver income for a dignified retirement, alongside government support, in an equitable and sustainable way”.

“It will still provide concessions to save for retirement through superannuation whilst improving the equity of the superannuation system and its fiscal sustainability over time through limiting the level of taxpayer support available to a small number of individuals with large balances.”

Consultation on the draft legislation will remain open until 18 October.

Last month, the Greens indicated that they would use their Senate balance of power to hold up the changes until the government agrees to pay super on paid parental leave.

Reactions slanted to the negative

Since first announced, the proposal has been met with much opposition from within the financial and superannuation sectors due to a number of suspected unintended consequences, most significantly the tax on unrealised gains.

The SMSFA, as well as national accounting bodies, said that this could force many SMSFs, which included farmers and small businesses, to sell assets to meet tax obligations.

In May, Treasury told SMSF Adviser that despite a myriad of assertions from various associations within the SMSF sector, the proposal would not disadvantage any group and allowed for both APRA-regulated funds and SMSFs to report on the same basis.

“The government’s approach to calculating the tax liability under the Better Targeted Superannuation Concessions measure balances simplicity of design with equity by leveraging existing fund reporting requirements,” Treasury said in an exclusive interview with SMSF Adviser.

“It treats individuals equally in applying a tax on large balances, whether they have an SMSF or are invested in an APRA-regulated fund.

But, subsequently, SMSFA CEO Peter Burgess opined that there is nothing simple or equitable about the government’s proposed approach.

“The concept of an adjusted total super balance, which will be necessary to ensure earnings are not inflated, doesn’t sound like a simple or efficient approach to me,” he said.

“And taxing unrealised gains, which appears to be an unfortunate consequence of the proposed approach, is hardly equitable and is hardly sector neutral when you consider the exposure that many SMSFs have to illiquid investments such as real property.

“We understand the difficulties that many APRA funds would face in having to report actual taxable earnings attributable to each member but why should the SMSF sector, which will be mostly impacted by this new tax, be penalised for this?

“All we are asking is that those funds that are able to report actual taxable member earnings be given the opportunity to do so with a deemed earning rate applied as the default approach for others. This, in our view, is the simplest and most equitable approach.

Additionally, the Centre for Independent Studies said the government’s plan to tax unrealised gains is unprecedented and will affect one in 10 Australians.

The CIS report argued that the taxing of unrealised gains was not only inequitable, but that the ATO does not collect this kind of data, so it is open to interpretation and misuse.

The Australia Shareholders’ Association (ASA), said its members have described the proposed legislation as the “thin edge of the wedge”.

ASA chief executive Rachel Waterhouse said one of the key matters concerning members is the intention of the proposed legislation and what it may end up doing in regard to unintended consequences.

“Our members are looking for sustainable retirement income policy and we think there are too many unintended consequences in this proposed legislation,” she said.