TSB to become more important if super proposal legislated

“It sounds like ‘everything I have in super’ and that’s more or less an accurate description,” she said.

“For some time now, it has been an important number when it comes to super contributions. For example, anyone whose TSB was more than $1.7 million at 30 June 2022 effectively could not make any personal contributions to super known as ‘non-concessional’ contributions in 2022/23.”

However, Ms Heffron said the government’s proposal involves levying the new tax on an individual’s ‘earnings’ in super and these will be measured by the growth in their TSB. “The argument is that if a member’s TSB has increased from $5 million to $5.5 million in a year when they’ve taken nothing out of super and haven’t added any new contributions, that $500,000 has come from ‘earnings,” she said

She said the most controversial aspect is that this particular earnings amount is made up of all sorts of things that wouldn’t normally be taxed and includes growth in the value of the fund’s underlying assets even though they haven’t been sold – unrealised capital gains.

“Many people with large super balances are about to care even more about exactly what goes into a TSB than they used to,” she said.

She said there are three ‘quirks’ to the proposal she believes need to be considered.

Firstly, balance in theory versus balance in practice.

“TSB on a particular day is technically ‘what you’d get if you withdrew all your super that day’,” she said.

“In an SMSF, that’s often not the same as the amount on your member statement.”

Ms Heffron said a member statement is based on the fund’s financial statements which effectively treat the fund like a going concern. In accordance with the accounting rules, they don’t allow for every cost that would be incurred if the fund really did have to pay out all members’ benefits that day.

“For example, they don’t allow for the transaction costs of selling a major asset like a property, the costs associated with winding up the fund,” she said.

Although a financial statements can account for the tax cost of selling everything on a particular day, and the capital gains tax that would be paid if all the assets were sold, they often don’t.

“Tax in an SMSF is highly influenced by exactly what’s happening with the members at a particular time and that can change quickly and often,” Ms Heffron said.

“For example, when SMSF members start retirement phase pensions, the fund stops paying tax on some of its investment income. For example, if 40 per cent of the fund is supporting retirement phase pensions, then 40 per cent of the fund’s investment income is exempt from tax and 40 per cent of any capital gains would be ignored if all the assets were sold,” she said.

This means, she warned, that the ‘correct’ allowance to make for capital gains tax in one year (before the pensions start) and the next (once they’re in place) could be very different.

This would also change if one of the pension members died and going forward a smaller percentage of the fund was in pension phase.

“For this reason, SMSF financial statements are often prepared ignoring this potential tax altogether. Instead, it’s allowed for when it’s actually paid, that is, when the assets are really sold,” she said.

Ms Heffron said although it may be more desirable to make sure these costs are, in the future, allowed to make TSB as low as possible, it is worth remembering that the earnings amount for this tax is the change in TSB from one year to the next.

“So, it won’t always be desirable to make TSB in a particular year as low as possible. What will often be more important is minimising the growth from one 30 June to the next,” she said.

“Paradoxically, that might mean continuing to ignore these extra costs and taxes or it might mean including them. It will be something to work out on a case-by-case basis.”

She also warned that TSB is more complicated for a member who has inherited a spouse’s super via something like a ‘reversionary pension’.

She said this amount will be included in the spouse’s TSB immediately and often comes as a surprise because for other purposes the treatment of reversionary pensions is different.

“For example, let’s say Carl has an account-based pension worth $2 million in his SMSF in 2025/26. He dies on 1 May 2026 and the pension continues automatically to his wife Jane – the pension is ‘reversionary’,” she said.

“Jane knows about the TSB which limits how much super she can put into a pension, and this will include the pension she’s just inherited from Carl. But the law specifically gives her a 12-month window here – she doesn’t have to worry about her own TSB until 1 May 2027.

“In contrast, Carl’s pension will be part of her TSB immediately for the $3 million tax, from 1 May 2026. That means that when the new tax is worked out on 30 June 2026, it will count towards the $3 million limit for her. Jane has always assumed the new tax wouldn’t apply to her (she only had $2 million in super herself, comfortably below the $3 million threshold) but now that she’s inherited a new pension, she’s over the limit and she doesn’t have 12 months to think about it.”

Finally, Ms Heffron said the current proposal means the TSB at the end of the year will drive how much of the ‘earnings’ amount is taxed and could create strange outcomes.

“Let’s consider Tim whose TSB was $9 million on 30 June 2025 and it grew to $10 million by 29 June 2026,” she said.

“At this stage Tim hasn’t added any contributions or taken any withdrawals from his super so his earnings amount for the new tax is $1 million.

“If he does nothing, Tim is facing 15% tax on 70% of this $1 million in earnings. The calculation proposed at this stage is to tax the following proportion of Tim’s earnings:

TSB at the end of the year ($10m) - $3m
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TSB at the end of the year ($10m)

= 70% (effectively, it’s the proportion of Tim’s TSB that is over $3m)

“That means a tax bill of $105,000.”

However, she continued, if Tim withdrew $6 million on 30 June 2026, leaving a TSB of only $4 million at 30 June 2026 there would be a different outcome.

“His earnings amount would still be $1 million because the formula adjusts for withdrawals. It would be calculated as:

($4m + $6m) - $9m = $1m

Tim would have to ‘add back’ the $6 million withdrawal to his final TSB of $4 million. However, a much smaller proportion of Tim’s earnings would be taxed:

TSB at the end of the year ($4m) - $3m
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TSB at the end of the year ($4m)

= 25% (effectively, it’s the proportion of Tim’s TSB that is over $3 million)

Now his tax bill is only $37,500,” she said.