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Foreign super funds may be affected by $3m super tax proposal, warns lawyer

By Keeli Cambourne
May 08 2023
2 minute read
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An SMSF specialist lawyer has warned the new $3 million super tax will, in addition to taxing unrealised gains, also apply to any increase in the value of a foreign superannuation fund (FSF) balance.

Daniel Butler, director of DBA Lawyers, said this might be an unintended application of the legislative provisions given FSFs do not obtain concessional tax treatment in Australia.

“However, the definition of ‘total superannuation balance’ (TSB) in s 307-230 ITAA 1997 includes superannuation interests in FSFs that satisfy the definition of a ‘superannuation fund’,” he said.


In analysing the legislation Mr Butler said he believes TSB also covers superannuation interests in FSFs that satisfy the above definition of superannuation fund in s 10 of SISA.

Moreover, certain non-regulated funds/trusts that also satisfy this definition would also appear to be included within a member’s TSB, the following is an analysis of the legislation.

He pointed to the following extract from the definition of TSB in 307-230(1) of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997):

(1) Your total superannuation balance, at a particular time, is the sum of the following:

  1. if you have one or more * superannuation interests that are not in the * retirement phase--the * accumulation phase values, at that time, of each such interest;

  1. This balance ties up with value of ‘superannuation interest’ as defined in s 995 ITAA 1997 to mean:
  2. an interest in a * superannuation fund; or
  3. an interest in an * approved deposit fund; or
  4. an * RSA; or
  5. an interest in a * superannuation annuity.
  6. An ‘interest in a superannuation fund’ does not include the word ‘regulated’ and therefore can include a non-regulated superannuation fund including a FSF. In contrast, paragraph (d) of s 307-230(1) expressly refers to ‘regulated’ superannuation fund as shown in the following extract from para (1)(d) (as highlighted):

(d) If you have an LRBA amount under section 307-231 of ITAA 1997 (about limited recourse borrowing arrangements) in relation to one or more * regulated superannuation funds – the LRBA amounts for each such regulated superannuation fund.

  1. ‘Superannuation fund’ as defined in s 995 of ITAA 1997 has the meaning given by s 10 of the Superannuation Industry (Supervision) Act 1993 (SISA), which defines it as:

 (a) A fund that:

(i) Is an indefinitely continuing fund; and

(ii) Is a provident, benefit, superannuation or retirement fund; or

(b) A public sector superannuation scheme

“There are some overseas superannuation/retirement funds/plans that do not satisfy the above definition of superannuation fund such as a 401K plan that are popular in the United States,” he said.

“This is because these plans often provide greater flexibility compared to the Australian superannuation rules that require benefits in superannuation funds to be preserved until retirement or preservation age and preclude loans to members.”

He said the new tax being applied to members with FSFs may deter Australians currently residing overseas returning to Australia as their overseas retirement/pension savings may become subject to the new $3 million-plus tax that is proposed to apply in Australia from 1 July 2025.

“Indeed, the new 15 per cent tax appears to apply to FSFs even if the member continues to reside overseas; however there is the practical difficulty of collecting such a tax from foreign residents.”

Additionally, he pointed out that the explanatory memorandum introducing the TSB from 1 July 2017 (s 5:18) suggests that the TSB is only intended to cover superannuation interests in regulated superannuation funds.

Commentary from the ATO on its own website also appears limited and unclear on point.

 “It will be interesting to see if a carve-out will be made for superannuation interests in FSF,” he said.

“Indeed, in my view, an adjustment to the definition of TSB in s 307-230 should be made asap so that it is expressly clear that superannuation interests in non-regulated superannuation funds (which would cover most FSFs) are not included in a person’s TSB.”

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