The Albanese government has published draft legislation on its plan to reduce the tax concessions available to individuals with superannuation balances above $3 million.
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.
Treasury said this was the easiest and simplest way to administer the tax ( by including unrealized gains ) . Would be so easy to have a separate line in the members statement section of the annual return so that appropriate year end balances are shown and the unrealized line can be segregated and excluded from the calculation . Bet BGL and others could have their software updated on a moments notice . The proposed changes wont be effective until after the next Federal election and the Libs don’t support it
A tax on those under preservation age with balances in excess of $3m. For those who have satisfied a condition of release, many will consider the benefits of withdrawing the excess and contributing in their spouse’s name or on behalf of the children if they want to keep the money in the constantly changing superannuation environment. The government will be lucky to raise half the money they have budgeted for with this utterly unnecessary and overcomplicated legislation. The sooner they are gone the better!
Based on the 2022 SMSF Tax Return, as an example, under the current proposal, our tax would have increased from 15% to 46.9%.
Based on 2023 SMSF Tax Return, as an example, under the current proposal, our tax would have increased from 15% to 45.7%.
I would now be required to pay 91.6% of my retirement income from my SMSF on tax, leaving me not enough to live on.
Dignified? No!
Fair or Equitable? How?
My savings will not be preserved because the government sees my savings as easy pickings.
My pension won’t be sustainable because I will be forced to sell the assets that generate the unrealised gains that the government now wants to tax. And I am assuming that they will also want the Capital Gains Tax when the asset is eventually sold?
I do not pay these rates outside of super but would be required to pay them within super? Even at the top tax rates, the thresholds smooth out the highest tax rate. No one pays 47% tax on 100% of their taxable income in any tax vehicle in Australia as a resident. Yet, we could be expected to in super? Or very close to it in our case. This is ludicrous.
The rates above represent more than a 3-fold increase, so how dare they say it is only a doubling of tax rate. It is not! Everyone needs to understand that by taxing unrealised capital gains there are huge consequences to this and in our case, it would certainly mean selling assets that were designed to make our retirement self-funding (the whole point of superannuation) – unlike politicians pensions which are unfunded – defined benefit schemes.
Rules for some I ask?
And why are SMSF members being treated so unfairly when we can, in most cases, report actual taxable earnings attributable to each member without taking into account the unrealised gains, which are pie in the sky valuations on one day of the year, not taking into account exit fees (agency commissions, CGT,legal fees, advertising fees etc etc) for those properties.
We will be moving assets out of super if this comes to be. We won’t then have to pay these ridiculous rates of tax on unrealised gains.
This may not help the downsizing initiative much.
Upsizing with the excess taken from super is beginning to look like a reasonable way to remove some of the taxation uncertainty engendered by this broken promise legislation.
I wish now I had read and heeded Roger Montgomery’s original advice to not put any unforced money into super due to anticipated perennial governmental interference with the rules
I doubt the government will even receive 10% of their expeted $2.3B as most of the monies belong to members of SMSF, who are not ordinary people – If they can collect over $3M in super (which itself is an achievement), they can certainly make that same money disappear from super !
Step 1 – impose a new tax on a supposedly high threshold
Step 2- lower the threshold
Kaboom, killed a good thing