Many clients spooked by the proposed new tax on super balances over $3 million are contemplating withdrawing large amounts from their super in the next few years before the tax takes effect (2025–26).
My modelling suggests this is actually not a great idea in many cases. But the fact remains some clients will do it.
Often that will require realising a large capital gain in the fund – either because the fund needs to find cash to make the payout or because the trustee is choosing to transfer assets directly out of the fund to their new home. The tax paid by the fund on these capital gains can be profoundly impacted by how and when this happens.
Consider Tarik, who is the only member of their SMSF. Throughout 2024–25 their super fund balance is around $7 million ($2 million in pension phase, $5 million in accumulation phase).
In June 2025, enough assets are sold to pay out a $4 million benefit to Tarik. In the process, the fund realises a $1 million capital gain.
In the normal course of events, Tarik’s SMSF would receive an actuarial certificate which would stipulate that around 29 per cent of all income during 2024–25 is exempt from tax (its “exempt current pension income” or “ECPI”).
This is worked out by looking at the average balance of the pension account throughout the entire year (around $2 million) v the average balance of the fund over the same period ($7 million) – hence 29 per cent. The remaining 71 per cent of the capital gain would be taxable resulting in a tax bill as follows:
$1 million capital gain x 2/3 (normal discounting) x (1 – 29 per cent) x 15 per cent = $71,000.
As an aside, this is actually one of the reasons it’s often a bad idea to respond to the new tax by taking money out of super. It forces the fund to realise, and pay tax on, a capital gain that might have built up over many years and to do so now rather than in the future. It’s often far better to just leave the assets in super and cop the new tax. But I digress.
Let’s assume Tarik can’t be persuaded not to take this money out of super. Would there be a better way of doing it?
There is.
Tarik could wait until July 2025, then sell/transfer the asset(s) very early in the financial year, ensuring that:
- The capital gain is taxable in 2025–26 rather than 2024–25
- The accumulation account drops to around $1 million very early in 2025–26
The reason this is a good thing is that the amount of the capital gain that will be classified as ECPI in 2025/26 depends on the actuarial certificate for that year. For most of 2025–26, the fund will have a total balance of around $3 million, of which $2 million will be in pension phase.
The actuarial per cent for 2025/26 will therefore be around 67 per cent. It doesn’t matter at all that it would have been vastly lower (around 29 per cent) if it was calculated just at the time the asset was sold.
Tarik’s SMSF would therefore pay much less tax on the capital gain:
$1 million x 2/3 x (1 – 67 per cent) x 15 per cent = $33,000 (a $38,000 saving).
The key is that the money needs to be taken out of the fund quickly – the longer Tarik’s accumulation balance continues at its very high level of $5 million, the lower the actuarial per cent for 2025–26.
If it will take a little time to sell some of the fund’s assets or arrange transfers, Tarik could even think about taking “as much possible” in cash towards the end of 2024–25 to get their accumulation balance as low as possible even before the year starts. They just want to delay triggering any capital gains until after 1 July.
But won’t waiting until July 2025 expose Tarik to the new tax we’re so desperate to avoid?
Not if it’s introduced as currently announced by Treasury. The various formulae used to work out how much tax Tarik pays depend very heavily on what proportion of their balance is over $3 million at 30 June 2026 (not 30 June 2025).
Even better, while the new tax is due to be paid on all growth on Tarik’s super account between 1 July 2025 and 30 June 2026, simply selling an asset in July for roughly what it was worth a few weeks earlier on 30 June 2025 won’t have any impact at all.
This might be counterintuitive but it’s a natural function of the way the new tax is intended to work. It is intended to tax gains as they build up over time rather than when they are actually realised. In Tarik’s case, most or even all of the gain happened before 30 June 2025.
We have a number of tips and traps to help clients like Tarik and we’ll be covering them in detail at our Super Intensive Day in August/September. Register today to make sure you’re on top of all things SMSF for the new financial year.
