Here's what should replace the $3 million super tax

Bravo Tony.

This is a much more sensible idea - progressive tax rates on Super just like the Income Tax system. By capping the rate at 20% you retain the incentive for people to invest in Super and lock their money away for over 40 years.

It also gets around the unfair, ungrandfathered and retrospective nature of the proposed 15% Unrealised Capital Gains tax.

The proposed 15% Unrealised Capital Gains tax has so many many issues with it and so many known consequences which are negative for the nation longer term.

Is the Government listening??

No matter where you look div 296 is a poorly thought out tax. Under most tax systems the more you earn the more tax you pay, but not with this tax.
Consider person A with $4m in super and conservative investments earning 5% or $200k per year before tax. Div 296 equal to 200x(4.2-3)/4.2@15%=$8,571 will have to be paid.
Now consider person B with $2.7m in super and more aggressive investments earning 10% or $270k per year before tax. Div 296 will NOT have to be paid because the balance will be below 3m (2.7+0.27=2.97m)
So person B despite earning $70k more than person A will pay no div 296 tax. Go figure.

I'm not sure why everyone seems to think that this is going to be difficult for the ATO to adminster. The ATO already knows your super balance (and if you have multiple accounts, they know that too and just add them together). All that the ATO is going to do is look at your super balance(s) each year. If it exceeds $3M, they just compare it to the previous year, subtract one from the other (and if the previous years balance was less than $3M use $3M as last years figure) and then apply a flat 15% tax to the difference, so you will be paying an extra 15% tax on contributions as well as earnings). That is the reason they want to tax unrealised capital gains - they just want to make the calculation of the extra tax, extra simple. All the suggestions that people have above for trying to avoid it won't work - put the extra into another super fund, the ATO simply adds the 2 fund balances together, put the excess in the bank, the ATO already collects information from the banks on interest paid to each and every account. Put it into the sharemarket, ATO is already collecting the information on dividends paid to shareholders. The only way to avoid it is put the excess somewhere that it doesn't earn any interest (like an offset account) or under the mattress. I don't believe the issue is the extra tax but they do need to index the threshold, just like the thresholds for income tax should be indexed.

"then apply a flat 15% tax to the difference, so you will be paying an extra 15% tax on contributions as well as earnings":

Nope, not flat. Tax is asymptotic to 15% starting at $3 M. See formula.

Still simple calculation.

Difficulty comes when tax on unrealised gains exceeds real $cash in fund.
ATO has not yet said if it will take IOUs or not.

Imagine an asset gains 100 times to see the problem ATO will have extracting real $cash on $imaginary gains.

Just dumb method of taxation.

The reasoning is quite compelling - because there are older mostly male wealthy people with lots of super accumulated under current rules (often due to capital gains rather than lots of contributions) there are equity concerns. The unreasonable expectations of current older wealthy people should not be disturbed. The solution is simple - tax young people more, including females who will never have a lot of superannuation at retirement, to provide necessary revenue. Assume that it is easy to introduce a new tax regime which relies on only realised income. The argument can be reinforced by assuming there will be no change of government for 30 or 40 years and/or the ongoing government will never change the threshold for Division 296.

Hardly! Satirising the discussion is unbecoming, belittling, naive and disregards the nuanced points of unfairness and bad principle. Just because it only affects a few people does not make something acceptable. Our democracy should be better than this!

The principal objection is the taxing of unrealised gains. Almost everyone, bar Chalmers (an economist he is not), has stated that this is very bad policy! Taxing superannuation earnings in excess of $3M at a higher rate, is not nearly as contentious. Sure, some people won't like it. However, most reasonable people could accept this if, like other super thresholds it was also indexed, to account for the insidious effects of inflation!

As for "The argument can be reinforced by assuming there will be no change of government for 30 or 40 years and/or the ongoing government will never change the threshold for Division 296."

Historically, once legislated it is hard to change due to difficulties getting it through the Senate and the revenue now relied upon due to baked in spending. And surely if intentions are good then automatic indexing of the threshold (like other super thresholds) would be a show of good faith to allay unfounded concerns and make the policy fairer?

“tax young people more”

We should not forget that so called “older wealthy people” were young once and had to wear a significant income tax burden. Bear in mind that compulsory superannuation was only getting started in 1992 so the burden on young workers included aged care for the previous and current retired generations as well as saving for their own retirement via compulsory super. Before 2000 there was no GST to spread the burden and Australia's income tax burden was acknowledged to be relatively high compared to OECD peers. In any event consider some key differences between the tax rates in 1995 (when the older were younger) and 2025.

1995

Tax-free threshold $5,400
Top marginal rate 47% from $50,000

2025

Tax-free threshold $18,200
Top marginal rate 45% from $190,001 (incl 2024 cuts)

Tax paid by average income earner:

1995 $35,000 ~$8,423 ~24.1%
2025 $100,000 ~$22,788 ~22.8%

This is not about taxing young people more. If there must be increased super taxes, it’s about an approach that spreads a fairer, moderate tax consistently over a working life, protecting the young from a bad, unpredictable tax in retirement. And at the same time, shielding current retirees from unfair retrospective changes.

Getting rid of the NDIS would be a great way to save the country money. At a minimum stop the rorting of the scheme by tightening eligibility for benefits.
1. Are there really 1 in 9 kids on the autism spectrum in Australia ?
2. Do not allow people to shop for a doctor who will tick the required boxes

At the very least means test it. I have a client on $150k NDIS package that has $2m in super...does not seem right.

Why not just leave the Super alone ALP..
And instead go after the many multinationals that pay Zero tax as one.
Then as two, stop brining in millions of the wrong people.
Bring in people who fit Australian values - culture and that have the capacity to start a business..
Stop screwing the Australian people, ALP..

While the suggestions in the article have merit, the government wants to grab some cash now from the old and rich. Your suggestions will not do that, they will mean the government is taking money from the newer younger rich and not us lucky boomers in pension mode. I agree with the comments here that a simpler solution is to force people to move their money out of their SMSF or industry fund if the balance is greater than a certain figure for a time period. Doing the tax return for an SMSF is hard enough already and Div 296 will make it worse. For example we will all need actuarial statements even if we are in pension mode which is not the case at present.

As an actuary , that would not be all bad! Just silly.

John

All academic folks - it is going to happen the only change being, I suspect, is Indexation to keep ACTU and Industry Funds onside.

Another deep trawl through the options is a 2-3 year process and that is NOT going to happen. Personally impacted and already moving money. Jim will get zip, kids and grandkids will do ok

It all comes down to what you are trying to fix. These seem to be front of mind.
1. Rorting of super scheme for tax minimisation/inheritance purposes rather than retirement income
2. Unsustainable tax concessions
3. Unnecessary red tape - any change should reduce complexity, not add to it
4. Maintain the core integrity of the super scheme (and our tax system by extension)
5. Keeping businesses eg farms etc out of the low tax environment. I still don’t understand how farms get to be part of super
Neither this proposal or the Treasurer’s proposal tick these boxes with any elegance or nuance.

"2. Unsustainable tax concessions"

That assertion is contentious as a lot of discussion and analysis has indicated. Treasury likes to look at any money you get to keep as a concession compared to what they would rake in at the a 47% tax/medicare take. It's a lazy convenient tale to justify their actions. Don't fall for it.

Again where's the parallel discussion about unsustainable public servant DB schemes already costing the tax payer $20B per year and a liability growing that the Future Fund will never meet?

Government actually encouraged people to put "the business, the office or the farm in your super fund". Ask Howard and Costello. It was meant as a way of lifting balances for people without the benefit of a working life of contributions.

I agree. Blind Freddy can see that’s what going to happen. Getting you to move your money out is exactly what is intended. Labor is offended by large super balances attracting tax concessions that could be spent on favoured projects. Industry funds are offended by large super balances in SMSFs not generating any fees. Once the money is outside super it is extremely difficult to put back. Mission accomplished.

Yes "but"! There is a point in your life where money in Super makes no sense anyway - terminal illness over 85 ish. Critical point is that while big money will flow out of Super, mission accomplished, the majority, I expect, will not flow to Camberra. Mission failed.

"There is a point in your life where money in Super makes no sense":

Also when tax rate outside super <= tax rate in super.

How much capital for nominal earnings to equal the couple SAPTO tax free threshold [ 0% tax ] = 2 * $31002 = $62,004, no drawdown of capital [ nominal FV = PV ]?:
= 62002 / 5%
= $1,240,040

And when capital <= Part Age Pension Asset Threshold $1,059,000 and have worthwhile home improvements to reduce capital to <= Full Age Pension Asset Threshold $481,500.

such a simple solution to all this. Pick a number…i suggest two times the TBC, so $4 now (and it’s indexed). Above that, sell down each year the amount over $4m. The problem of illiquid/unlisted assets (land, farms etc)…give people 5 years to get them out

Done and get rid of all the other stupid super rules and need for accountants. Put as much in when ever you want (our lives are all different)…but always remove anything over the $4 million (or wherever level is deemed appropriate)

The tax on unrealised gains on super is unlikely to raise much actual long term revenue as those above the $3m threshold recalibrate portfolios etc. We should do more of the Ken Henry reforms as well as ensure that the extraction of finite mineral resources fund a sovereign well fund like many other countries do. In any event the $3m amount MUST be indexed perhaps to the higher of the CPI and WPI.

Yes to a sovereign wealth fund. This idea comes up all the time but is never acted upon. The government's always want to spend any "bonus" monies if and as they co.e through. Short- term thinking and then it's wasted and gone.
But rather than tax reforms, first we need to look at the waste, in my opinion. Playing around with tax reform is usually code for more money for the government to waste.

Totally agree! Super should not be an infinite space for low tax accumulation as its purpose is to provide a solid retirement income stream. Limit the maximum and then let the wealthy invest in other forms outside this scheme.

The author says "if we must have an increase in superannuation tax - and more fiscal discipline would be preferable"
Fiscal discipline by the government, particularly finding savings in wasteful, unnecessary, extravagent and duplicated government expenditure is far preferable to increasing the taxes on retirees to pay for ever increasing fiscal indiscipline. We should not even be debating this red herring of Div296. We retirees, future retirees, the old, the young, SMSF members, accountants, financial industry advisors ... should all be forcefully telling this big spending over promising government to control its own expenditure before dictating ours, not arguing over the mechanics of a second best solution.

Super should have been allocated in as tax free and also not be taxed during accumulation phase. Once switched to pension phase, it is then taxed at the marginal rate.

"allocated in as tax free and also not be taxed during accumulation phase. Once switched to pension phase, it is then taxed at the marginal rate":

Annuity type pension scheme vs super disbursement type scheme.

Government must wait 40 years for tax vs quarterly payment of tax.

No difference in payments to retiree that could not be eliminated by a minor change in tax rates.

Big difference with annuity scheme is government must own the capital to prevent lump sums being 'stolen' and confiscate remaining capital on death of pensioner and their beneficiaries.

Whereas with super the superannuant / retiree owns the capital and any 'theft' of lump sums is from their 0% taxed disbursement account to their individual rate taxed account.

As if Super wasn't complicated enough already for the majority of people. Anything but this.

The problem is not a 27 year old accumulating excess super and its associated tax concessions. The existing caps on contributions already prevent that. The problem is the number of large super funds that are a function of unlimited non-concessional (after-tax) contributions that were permitted before Costello turned the tap off in 2007. These contributions were then converted into tax-free pension funds until Morrison limited that concession with the Transfer Balance Cap (TBC) in 2017.

Super in excess of the TBC in 2017 was transferred to accumulation funds and remain concessionally taxed at 15%. Some funds have in excess of $100 million. Tony’s suggestion would not affect them.

These funds represent the investment of after-tax money and are no different to shares, property or the family home which all require the investment of after-tax money. Super's distinguishing feature is the concessional tax on investment earnings in an accumulation fund in retirement that requires no withdrawals to generate any retirement income, ever. Thus they can continue to grow until death when they also pay very little tax on death benefits. Until then, they are the estate planning vehicle of choice.

These obscene tax concessions leads to calls for increased taxes on super pension funds, which again will not address the issue of large accumulation funds in retirement - that do nothing to fund retirement.

Totally agree Jon. And there needs to be a mechanism to phase those funds out. I did mention that a backstop of some sort would be needed to deal with those ultra-high balances in the absence of Div 296, and I would have liked to explore that further but there is only so much you can write about in one article.

Why not work out how much tax subsidy we need to remove from the current system to make it sustainable (say $2 billion annually), and based on member demographics (which the ATO and Treasury have access to) estimate the additional rate we should apply to the current accumulation and pension phase rates of 15% and 0%?
Review this every ten years to be resilient to inevitable changes in demography and balances in either phase.
As this will merely leverage the existing regime of concessional tax, the feared work creation burden on the ATO could be avoided.
The only criticism I can think of in the immortal words of the amoral boffins: ‘It may work in practice, but never in theory!’
And I am an actuary….!

There have been a couple of questions around what would happen if there was no non-super taxable income in retirement, such that the retiree has a marginal tax rate of zero.

Just to clarify, I said in the article that there would be a 15% tax rate floor. So that even in retirement, at least 15% tax would apply to taxable super income. That would be consistent with the current treatment of super accounts above the transfer balance cap (now $2m in tax-free pension phase).

And if a retiree had substantial non-super income from say property, trusts, or other investments, that pushed their marginal tax rate over 30%, then the progressive super tax scale would apply to their taxable portions of super.

So retirees with large balances and large non-super income would still contribute proportionally. Equally, a progressive contributions tax would apply to any concessional contributions made in retirement.

What a dog’s breakfast- get rid of super altogether, everyone go back into the usual tax system and all receive aged pension - far simpler - govt doesn’t miss out

I am inclined to agree. There is far too much red tape and at the end ogmf the day, I'm with the introduction of Div 293 and now Div 296, what is the point if super?
Then use compounding amd leveraging to grow savings even more. Let the government look after those that already are tax positive, and eho want to stay there with the govts blessings, and let's just all move on towards our own destiny without
this level of govt interferene.
Let's face it, the ones diligent enough to save are the 10 to 30 % that are tax negative, and these people know how to grow wealth and do not want to be one of the masses that generally support Labor.
We can still have asset protection, but be able to play in a field with far less egregious rules which are ultimately designed to keep everyone poor, so that they keep voting Labor. Truly, my mind bogles at the current stinking thinking of the current Labor party and our embarrassing Treasury that dreams up this nonsense.
Am I over it all? You bet. I am niw growing my wealth outside of super and I enjoy no more locked up money sitting there to be raided by a greedy government and fickle changes in tax law with the myriad of consequences that come with it.
It's called "FREEDOM ".

Whilst I don't like the tax on balances above $3m that's not what keeps me up at night. It's the proposed tax on unrealised gains that will - in an increasingly likely scenario - wipe out my superannuation in a single year. You see I have invested in a series of biotech companies - very small amounts but two have surprised on the upside by increasing in value by over 200X. Further increases are forecast so that, in one example, an investment of $30k in 2017 may be revalued to US$10m next year in a pre-IPO round. Which means I will have script with no secondary market and a valuation that may drop to zero (if phase two testing fails) the following year but I will be up for over A$3.7m of taxes which would render my super fund insolvent. I only invested $30k. The founders will have over $150m each in this venture. Issued at mere cents 15 years ago. All scientists. They would be completely wiped out as they used their super to fund these ventures in retirement. This feature of the Div 296 (unrealised gains) will have the effect of bringing startup investments to a grinding halt unless the definition of valuation is tweaked so that it includes the ability to sell the asset to fund the tax liability.

A simple solution would be to allow assets with such windfall unrealised gains to transfer these assets out of super into a company or personal account. Then tax would only occur on realisation, but at a higher tax rate (perhaps not unreasonable for windfall gains).
Perhaps the same could be done with farms or business assets. It is arguable that such assets should never have been allowed in a superannuation fund.
Much has been made about the impact of the change on startups. Most VC funding for them comes from institutional investors. UHNW investors make up but a tiny fraction of VC investment.

The new tax is only on the 'earnings' after a certain date. If you value the shares at say $10m on 30 June 2025, then the tax is only on the increase after that (not from the day one $30k). Your SMSF should already be valuing the shares at a 'market price'.

Same for the founders - mark to market at $150m as the starting point and then be taxed on future increases.

"The new tax is only on the 'earnings' after a certain date. If you value the shares at say $10m on 30 June 2025, then the tax is only on the increase after that (not from the day one $30k)"

Yes it means that you wanted the shares to rise (rather than fall) by 30 June because any gain before 30 June is not counted but the same gain after 30 June is-however a more troubling aspect of the new tax is that you will pay tax AGAIN on the SAME gain when you come to sell the shares and this one (CGT) does go back to day one.

"mark to market at $150m as the starting point and then be taxed on future increases":

That is what is objectionable: taxing unrealised gains with ATO demanding settlement in $cash, not IOUs.

Eventually unrealised gains either 'disappear' or are realised as $cash. Taxing when $cash is available is surest for government and least disrupting to taxpayer.

This approach is flawed in that it focuses on and targets PAYG salary earners, and we all know the clever accountants and lawyers will side step this via SMSFs, discretionary family trusts and other tax minimisations schemes and plays.

The Howard government blew up the shop when it made super post 60 a tax free haven. Time to right that wrong and apply appropriate universal tax treatment across the board, and rightfully set caps on taxpayer subsidised contribution concessions, balance and intergenerational transfer of monies and wealth earmarked for one thing and one thing alone - a person’s retirement income.

Your welcome.

You are exactly right, had Howard and Costello not made over 60 super tax free, then all these band aid solutions (pension transfer limit, $3m extra tax) would be unnecessary.

Reverse that mistake and most of the concerns disappear.

Or we can go back to basics and say no tax on super going in, and it gets taxed as income as it comes out (for concessional contributions and earnings, tax free on withdrawal of non-concessional contributions). Effectively consider super as an "income equalisation system" over your lifetime, where you postpone getting taxed on contributions until you withdraw those contributions.

I agree entirely John S, simple and ideal for the purpose of superannuation.
It would be a win-win: members would get compound interest on a larger sum, and even with income tax on retirement benefits they would be better off in retirement. It would encourage people to take super as an income in retirement to avoid higher income tax rates hitting lump sums. It would also remove the incentive to use super as a tax haven.
The government revenue would have a higher NPV because of the compounding of larger amounts and higher tax revenue in the future, when demographics will drive government costs higher.
Unfortunately, the government will never forego the annual contributions tax income ($11 billion in 2019-20). Governments are not interested in 50-year NPVs, they are concerned about government revenue during the current term of parliament.

JohnS if that is such a great revenue raiser you need to explain why no government, of any persuasion, has done this since 2007. That exit tax collected little revenue then, and wouldn’t now. That why is it was easy to do - little fiscal pain for political gain.
That tax on withdrawals still applies today to death benefits. Large super funds pay less tax, not more as I explained here:

www.firstlinks.com.au/myth-costellos-generosity-tax-free-super

SMSF are no more or less a tax minimumisation scheme or play than other super funds. so why didn't you mention industry funds in your list.

"we all know the clever accountants and lawyers will side step this via SMSFs":

We dummies at the back are eager to learn this new dance. Please tell.

Totally agree. Howard and Costello were way to generous. Superannnuation has become a dog's breakfast.

Remove the tax free status of superannuation once it is in pension mode. Increase the tax rate to 20% or 25% on assessable income (not unrealised gains) once the value of the fund exceeds $3 million.
Deined benefit pensions shoud be closed down, letting high paid public servants salary sacrifice a $100,000 a year into super is ridiculous.

You could make an arguement that superannuation should be voluntary. Pay everybody the 12% as wages and tax it as wages. Anything that goes into super as a salary sacrifice or concessional contribution is claimed as a deduction so you get the tax back. There are several benefits
- young people get access to extra money to save for a deposit
- people who would rather invest in property then super to fund their retirement get to use the money as they see fit
- people who do contribute to super get a large refund at tax time. They can do something meaningful with it like make a large payment to the mortgage. Noone notices $60 a week, $3000 as a tax refund will get used.
- it doesn't cost the government any money, in fact the tax collected from people who don't make super contributions benefits the government.

The only losers are the trustees of the large super funds who get less money to levy fees on.

What a lot of people fail to understand is super was designed and meant to be used in retirement, not as a low tax scheme to shelter wealth and to pass on to the next generation.

For a while it served this purpose until 1 July 2007. The abolition if reasonable benefits limits converted super from an income source in retirement, to a legal tax avoidance scheme for the wealthy.

With the exception if not having automatic indexing of the proposed $3 million threshold, this is actually good tax policy. All it does is reduce the tax discount the wealthy get from excessive amounts in super.
Fact is a 65 year old does not need more than $3 million in super to give themselves a comfortable retirement, even if they live to 110.
Therefore anything above this amount is really only there because of the tax benefits and for estate planning, which is not what super is for.

As for the non indexing of super, I am not as concerned as others because I know this threshold will not remain at $3 million even without automatic indexation.

Income tax does not have automatic indexation either yet the top marginal tax threshold has increased over time as follows

1985. $35,000
1995. $50,000
2005. $85,000
2015. $180,000
2025. $190,000

As you can see, even without indexation the threshold has increased in every decade over the long term. The same thing will happen with this $3 million threshold, because politically no significant political party wants the middle classes to hit the threshold.

In principal though I like automatic increases in thresholds (including income tax thresholds).

If you don’t like the legislation there is nothing stopping anybody who has hit 65 withdrawing the money from super; but I doubt many will because super is still a concessionally taxed way to hoard one’s wealth.

I don't know why you think readers of this journal in particular fail to understand the purpose of superannuation? I'd say we have a pretty good idea. Your comment avoids the contentious area of taxing unrealised capital gains and the reasons why the decision was made to structure the new tax in this fashion. People, rightly, fear an extension of the principle to other areas.

I have zero issues with a cap on super completely at $x, whatever that number may be. But if that's the case, then it must be indexed. I'm sure a lot of people are with me on that one too.

As is being pointed out everywhere in the press right now, there are simpler ways of extracting more tax from super than Chalmers' new tax baby, if that's the policy objective, but no-one is listening, because that would be an admission that they were wrong and don't know everything, and you're not going to get that out of anyone in the current government.

I said it was good policy.
As a principal taxing unrealised capital gains is a good idea. If I bought $20,000 worth of Berkshire Hathaway shares at the end of September 1985 (after the introduction of CGT) those shares would now be worth close to $8 million. In those 40 years I have gained almost $8 million yet not paid even $1 in tax. (Berkshire Hathaway has not paid any dividends in that time and has no plans to).
Basically I would have earned $200,000 per annum yet never paid tax. Remember this is an investible asset.

This is how the wealthy become even more wealthy and paying tax, and some way of unrealised gains for the wealthy should not be contentious call, but should be considered as good tax policy.

"As a principal taxing unrealised capital gains is a good idea. If I bought $20,000 worth of Berkshire Hathaway shares at the end of September 1985 (after the introduction of CGT) those shares would now be worth close to $8 million. In those 40 years I have gained almost $8 million yet not paid even $1 in tax. (Berkshire Hathaway has not paid any dividends in that time and has no plans to).
Basically I would have earned $200,000 per annum yet never paid tax. Remember this is an investible asset.":

Berkshire Hathaway pays 21% company tax on taxable income, like all USAn domiciled companies.
https://www.macrotrends.net/stocks/charts/BRK.B/berkshire-hathaway/total-provision-income-taxes

As a shareholder, your share of the company profit is reduced by the taxes the company paid.

You did not pay tax, the company paid 21% of your share of the company's profit.

USA does not have imputation of company tax to dividend recipient.

Aus does have imputation of company tax to dividend recipient, company tax rate being 25% or 30%.
Just like employer paying wages tax and employee claiming wage tax credit, then paying tax on the grossed up income minus the wage tax credit.
If dividend recipient tax rate is 0%, they receive full refund of taxes company paid on their share of grossed up dividend.
Single taxation.

The USAn shareholder always loses 21% of their share of company profit to USAn company tax.
The will lose more if their tax rate is greater than 0%.
Double taxation.

Taxes on unrealised capital gains are rotten.

"If you don’t like the legislation there is nothing stopping anybody who has hit 65 withdrawing the money from super". Oh yes? Just wait a short time. The inability to cash out as much of your super as you want, after retirement, will be the next on the Chalmers hit list. The government's description of super is to "preserve" capital to fund retirement.

"With the exception if not having automatic indexing of the proposed $3 million threshold, this is actually good tax policy." and "I said it was good policy. As a principal taxing unrealised capital gains is a good idea"

I think Peter you're the Lone Ranger here. Even Tonto has deserted you!

Most economists, several ex Reserve Bank governors, Ken Henry, Paul Keating, Bill Kelty.... to name a few all think it is dreadful, lazy policy! They must all be wrong then I guess?!!

This whole process is going to turn into a logistical nightmare for the ATO - they are the only one's who know/can calculate the TSB (say I have a SMSF plus a left over industry super fund balance). The ATO has to collect all my super balances (how, when) and then calculate the new tax, then issue assessments and finally get payment (which can be by the SMSF or individual).

All this complicated approach then made reporting realised earnings too hard and hence the total balance approach that is now proposed (and obviously the industry funds all said this is too hard for them to calculate).

The ATO already collect your total super fund/s balance .
It will be relatively easy for them to do the calculation. That's why this approach was chosen.

If there must be higher tax on large balances - make it simple and easy to account for it.

Treat the excess > $3m like the 15% tax on the accumulation phase earnings. For balances > $3m (preferably indexed), add an extra 15% tax on the proportion of pre tax earnings attributable to the balance > $3m.

Example: Total Super $4m - opening balance. Pre Tax Earnings $300k.
- $2m (50%) in Pension Phase: Tax Free,
- $2m (50%) in accumulation: Tax = $300 x 50% x 15% = $22.5 ,
- $1m (25%) > $3m threshold: Tax = $300k x 25% x 15% = $11.25k
Total Tax $33.75k.

Simple, easy to understand and account for. Accommodated by the annual actuary reporting that is already in place - only required for funds in pension phase or assets >$3m. There would be additional complexity for those with multiple funds.

"make it simple and easy to account for it":

And easy to pay for it - when real cash is available. Unless ATO will take imaginary cash [IOU].

Unrealised gains = no cash realise = no cash to pay.

Yes, let's continue to push yesterday's problems on the next generation while we protect the old and rich.

"In summary, the Div 296 tax penalises time and compounding. It is a new tax on existing savings, a retrospective, balance-based tax. And it is complex and unpredictable at a time when retirees need clarity and certainty of cashflow."
Don't expect me to cry because a few retirees can no longer afford their $100k+ p.a. lifestyles. They should just be grateful that they had such a good deal for so many years in the first place. Let's be clear that every single person affected by Div296 right now are ahead of where they would have been if super did not exist at all. They have ALREADY taken advantage of the system.

Also I am not against progressive super tax (hello Div293?) or raising taxes in general but it's galling to think that the best we can do with tax funds is subsidise those who are already more well off than most people could expect to be in their lifetimes.

Frankly I'm disappointed that so much time and angst has been spent on this relatively minor tax and it only goes to show how self-interested the rich are and how disproportionately large of a voice they have in society.

"how self-interested the rich are and how disproportionately large of a voice they have in society"

Perhaps its because they also make a disproportionately large contribution to society (the top 1 per cent of earners forked out almost one-fifth of all personal tax revenue, or in other words about 20x their share), and therefore have a greater interest in how that disproportionate contribution is managed or mismanaged because if its the latter they may be at the front of the queue to make up the shortfall.

Which would not be objectionable except all they want to say is "we want to contribute less"

Hey Jude,

"push yesterday's problems....rich" might be so in essence but why demonise the "old and rich"? I, even though you have not defined these intrinsically rubbery words, may well fall into that category, not because I stole and pillaged but because I was thrifty, played by the rules, invested my contributions wisely and in high growth assets and here I am in the gunsights of a government clearly playing the class warfare game because their own fiscal responsibility is so poor and all their environmental projects are suffering absolutely massive cost blowouts which they take no responsibility for but want to partially offset. When the next generation finally wake up to this, they need to blame Canberra but not "the old and rich" who actually do need protection from the forces of envy.

Your second paragraph continues with the same logic in criticising a perfectly logical statement. I don't have a $100+K p.a. lifestyle but I have absolutely no issue with those that do. Put simply, they get taxed on that spending via GST and so contribute to the economy quite nicely as well as indirectly provide employment opportunity for others. You see, the economy is circular. Think about it. Those that "took advantage of the system" were actually encouraged to do so in order to protect the future social security budget and, in hindsight, the plan succeeded. Now you want to penalise those more successful super investors. Go figure.

Your last paragraph gets an A+ for being a rant. You provide no evidence for any of your "assertions" particularly the slander against successful individuals. Clearly, you are angry and, at the same time, green with envy. 

Finally, start looking at the bigger picture. This tax is not minor but likely to be a litmus test and thin edge of the wedge to determine how much resistance there is to taxing theoretical profits. If we shrug our shoulders and say that it doesn't affect me, then the take home message for the bureaucrats will be to expand into other areas. And if that comes to pass, please don't come whinging to me.

What about someone that has no taxable income because they are drawing a super pension. They may well have a large TSB but no non super taxable income

That thought had crossed my mind

You say there also needs to be a "hard cap" of say $5M. But how exactly would that "hard cap" be implemented? Would amounts above that cap need to be withdrawn from the concessionally taxed super environment? If so, then that is the simple alternative to Div 296. Why not make that upper limit tied to the Transfer Balance Cap, which already is indexed?

There are plenty of better ways to achieve the same objectives as Div 296, but redesigning contribution taxes is a very different issue.

This proposal assumes that APRA regulated funds are able to report to the ATO taxable income for each fund member, including only realised gains and applying the discount for realised capital gains in relation to assets held for more than 12 months. This could only be achieved at enormous administrative cost and is the reason why the alternative Div 296 approach based on opening and closing balance was developed. Reported fund earning rates include unrealised gains. It also would lead to many low income individuals paying more tax in the super environment than outside it.

Would it be possible to treat gains differently depending on whether they are in an Industry Fund or a SMSF?
Let Industry Funds continue to include unrealised gains to determine member balances and SMSFs to include realised gains in their balances as is currently the case.

"Higher super tax rates have cost him $300,000, or about 9.5%, over the 40 years."

And we're meant to celebrate this as being ok? Time to admit that our superannuation system is not world's best practice.

Most overseas juristictions don't tax contributions or earnings (maximum compounding) but tax withdrawals at marginal rates. Because our entire tax system is a dog's breakfast and we have governments that overspend we have a revenue problem. Super is just the politically lazy low hanging fruit.

And if anyone thinks that with more revenue government will spend more responsibly they need their heads read. The cause needs to be addressed not the symptoms!

No thanks to this either!

Trust and actuary to come up with this which is way too complicated.

A much simpler solution is to quarantine balances over $3m at 1 July, into a separate account and tax the earnings at 30% (like they did when pension cap was introduced). An actuary can work out the amount to be taxed at 30%, just like they do for pension/non-pension income now. This has the advantage of being a once and for all calculation for those over the limit and no more complicated than tracking the current pension limit for those who are not over the limit.

Alternately (and maybe in conjunction) reverse Costello's largesse and make the taxable component of super pensions taxable (with the 15% rebate) and make it compulsory to withdraw money from super at retirement/age pension age, like it was before 2007. The fact you can leave super in the system without withdrawing any if it is not what the system was set up for.

Or similar to JoanB's comment put your money into PPR and get a full/almost full pension (and downsize every 10 or so years so you have some extra cash to spend).

I agree this proposal is far too complicated and will be gamed anyway. It will probably put more pressure on the housing market by encouraging super members to negative gear investment properties to get their marginal rate down. Far better to put excess over $3 million into a separate super account and apply a rate of say 25% or require the excess to be withdrawn and put outside super. For fixed assets like farms and businesses currently in super these could be transferred to an associated entity on a once only basis and exempt from capital gains tax and stamp duty. These taxes will be recovered down the line. There could be a prohibition on these assets being in super in the future.

All the projections that the media report say that there will NEVER be any change to the $3m threshold - aka no indexation

Marginal tax rates aren't indexed either, but they keep going up. Almost every election there is an increase in the marginal tax thresholds, and I see no reason why that shouldn't also apply to the superannuation threshold (once there are sufficient people close to the $3m figure). The increase in thresholds (reduction in tax) will always be a vote buying exercise

So, my prediction, don't worry about the lack of indexation, the $3m will definitely increase over time

Neither should be open to blatant lazy vote buying. It's ludicrous that it is. Systemic error we're all too complacent to demand a fix for. Especially marginal tax thresholds that cost workers while whichever party decides when they'll reap the voting rewards for doing nothing. Except perhaps taking advantage of ignorant voters with short memories and attention spans.

Or we could perpetuate a mistake in the tax system by implementing it elsewhere. Smart.

What you say is correct, but why the demands for super threshold, without the demand that marginal tax thresholds? In fact, indexing marginal tax rates would benefit many more people than indexing super threshold

There is a difference between marginal tax rates and the super cap amount. People need money to live on and start to notice when more of their income is going to tax. That is, marginal tax rates affect the here and now. Not many people would notice the super cap not going up. It impacts the distant future, which not many people have the time or inclination to worry about.

I think this proposal has merit and should be explored further by Treasury and parliamentary decision makers. I would like them to also apply the tax rates both in the accumulation phase and the income stream phase to provide equity between those in accumulation phase and those in income stream phase.

Tony, given you are a former actuary, I can understand why you might believe your proposal "would be more understandable and palatable to the electorate". However you are vastly oversestimating the electorate's sophistication. For most of the electorate Div 296 is quite easy to understand. It's a tax on rich people who have gamed the system in the past, and it doesn't apply to ordinary people like themselves.

1. Buy a big house.
2. Spend all your savings and enjoy yourself.
3. Go on the full pension.
4. Let the pollies work out the rest...

And don't forget to reverse mortgage your big house and get the full pension

"It is a new tax on existing savings, a retrospective, balance-based tax. And it is complex and unpredictable at a time when retirees need clarity and certainty of cash flow."

Given the less than modest changes to super over recent years (eg.div 293, TBC, proposed div 296) the biggest challenge (apart from economic shocks, rampant inflation, regional wars, etc) for future savers is how to restore confidence in the system so that investment decisions made today are not seriously undermined by future government decisions. At the very least decisions affecting existing savings accumulated under existing rules need to be protected, otherwise there may be no point in suggesting improvements or changes that can be struck down at a whim because some future government wins an election and claims to have a mandate.

A simpler method would be to cap super at say 10x average annual income.

Thats enough for a dignified retirement. Any more is just feathering the nest - people can do that without a fat tax break.

Josh x10 is not enough, unless you don't care about inflation or plan on dying sooner than your possible lifetime. Further did you mean average or median? These would be quite different numbers, what about all the zero tax/income payers, what about the those on Centrelink? What number should you use? Even if you 100% own your house long term maintenance/running costs are roughly 2% p.a. of the value of the house. (A stat often missed by the resi promoters). How do equalise between someone living in Sydney vs Dunedoo? I think we need more sophistication than something that is overly simplified for a complex problem.

Maybe better to cap it at (say) 10 times the minimum wage, or even (say) 15 times the Jobseeker annual payment. That will allow/cause more to consider how fortunate they are rather than to whinge about their tax payable...
Super is meant to eventually make the Age Pension redundant for most - all but those who didn't have full employment during their working lives. The rest of us are fortunate and should focus on that good fortune rather than on what we might miss out on. And when are Australians going to understand that paying taxes is a good thing; it means you have profits and/or reasonable income AND if we don't pay for what society needs, who does?
Plenty keep saying "the government ought to do something about x, y or z" but the same people often don't want to pay for that government. Take ASIC as an example. How on earth can they possibly keep up with rule and law breakers (especially before the event) unless they are well funded? They can't and nor can they prohibit stupidity, any more than they can prevent criminal intent. Just sayin'...

“cap super at say 10x average annual income”

Capping super balances at an arbitrary multiple of average income would not address the disparities that currently exist in the retirement system where highly paid individuals (eg. bureaucrats such as judges, politicians and other fat cats) benefit from generous defined benefit schemes that are based on contributions and salary over the last 5 years. In other words these retirement schemes recognize that a “comfortable retirement” is not a one size fits all despite the schemes being FULLY funded by taxpayers unlike super where the taxpayer merely collects a little less tax than would otherwise be the case.