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

In my previous article, I derived break-even super tax rates required to allow for the cost of not being able to access super savings for up to decades. These rates increase with marginal income tax rates, yielding tax concessions adjusted for illiquidity, that rise with marginal rates. This analysis comes at a time when the proposed Division 296 superannuation tax is being hotly debated, particularly the unrealised capital gains tax component and non-indexation of the $3 million threshold.

Extrapolating from that article, if we must have an increase in superannuation tax - and more fiscal discipline would be preferable - then rather than introducing a Div 296 style tax for revenue raising purposes, it would seem more logical to implement a progressive scale of super tax rates, linked to marginal income tax rates. That is, replace the flat 15% tax rate on contributions and earnings with a scale of rates.

Such a structure would represent a discount to marginal tax rates, allowing for both the illiquid nature of compulsory super and the smoothing of real tax concessions across income levels.

Here's how it could work

Super tax rates could be determined by extensive data analysis and modelling, but for illustrative purposes, might look like this:

Marginal tax rate | Super tax rate
30% | 15%
37% | 17.5%
45% | 20%

Note: while a super tax rate of 15% might align well with a 30% marginal rate, 15% would also need to apply to marginal rates of 0% and 16% to maintain parity with the current system and to prevent gaming. A 15% floor on the super tax rate would ensure individuals cannot exploit periods of none or low non-super income, deliberate or otherwise, to reduce super tax. And though a super tax rate of the order of 10% might be fair for a 16% marginal rate, the current Low Income Superannuation Tax Offset could remain in place to address that.

A progressive super tax arrangement would essentially be an income-based approach, reflecting the idea that super is really a deferred income stream or deferred salary, taxed consistently with other income.

As opposed to a Div 296 tax that is basically a quasi-wealth tax, taxing amounts above an arbitrary threshold, and not respecting how super balances have been accumulated to date. It would potentially tax compound growth built up over decades under accepted current tax settings and disincentivise longevity in the workforce.

This alternate approach would be administratively possible because infrastructure is already in place to handle the Division 293 tax, being the extra 15% tax on voluntary contributions made on income levels in excess of $250,000. The ATO links personal income tax data with super contributions.

Part of the motivation for Div 296 was for it to deal with ultra-high super balances that use the super system as a tax-preferred environment to shield wealth. A progressive system would therefore need a backstop of some sort, like a hard cap attached such that accounts cannot exceed a certain balance of say, $5 million.

An example

To gain a feel for some numbers, consider the following example.

An individual aged 27 who has just crossed into the 37% marginal tax rate bracket has $50,000 super accumulated to date and has 12% SGC contributions going into super, with no other contributions. Wages growth is 2.5% p.a., and the fund earns 6% p.a. before tax. Assuming ad-hoc government increases in tax thresholds over time, he doesn’t push into the next tax bracket until age 47. According to the above scale, his super tax rate on earnings and contributions is 17.5% until age 47, and 20% thereafter.

At age 67, his super will have accumulated to $2.83 million. Had his super tax rate been a constant 15%, the fund would have grown to $3.13 million, and it would have reached the $3 million Div 296 threshold at age 66. Higher super tax rates have cost him $300,000, or about 9.5%, over the 40 years.

Some observations:

  • On a tax rate of 15%, the worker would be liable for Div 296 tax before retirement age. That is, even young workers on modest salaries today can eventually be hit with this tax due to the non-indexation of the $3 million threshold.
  • Yes, the individual would pay more tax throughout his working life under the progressive super tax scale but it would be consistent and predictable. Crucially, he would avoid the shadow of a Div 296 tax hanging over him in his retirement years, which could potentially erode more savings if his super balance continued to compound post retirement.
  • This would be a moderate increase in tax to retirement in exchange for long term certainty and simplicity. There is no logic in placing a back-ended Div 296 tax on retiree funds at a time when unfettered access to savings is needed more than ever in retirement years.
  • A progressive super tax system would avoid future shocks, with known rules around tax captured during a working life. It would essentially be pre-retirement reform as opposed to post, and it would align with existing tax structures.
  • The system wouldn’t penalise individuals who may end up with a balance of more than $3 million through working longer and/or having achieved superior investment returns.
  • High income earners would still pay more tax but transparently and proportionally.

As an aside. A system that maintained a flat earnings rate tax of 15% with just the contribution tax rate varying according to marginal tax rate could also be possible. For example, the above case would yield a similar tax take over the 40 years, if the 37% marginal rate mapped to a contribution tax rate of 22%, and 45% to 30%. However, such a system would not be as clean as one with the same tax rate applied to both earnings and contributions.

From a revenue raising perspective, the Div 296 tax is projected to collect around $2 billion in the first year of operation across some 80,000 super accounts with balances in excess of $3 million. Being a more lump sum-based tax, the average tax take per person would be considerably higher from year to year than an income-based tax. But under my proposal, there would be a much broader base, with the extra super tax take commencing at income levels a little over average earnings across potentially millions of workers.

And there would be less chance of any behavioural erosion of the base under my approach as it would be more understandable and palatable to the electorate than the incoherent Div 296 tax.

Again, the ultimate position would be determined by modelling though a progressive tax system should raise moderate and consistent revenue per account over time from not just the wealthy but also average earning workers. A lower burden per person but with a far broader base could still see the required revenue raised.

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.

However, a progressive tax model, across income levels at a discounted marginal tax rate, wouldn’t materially affect the retirement nest egg for middle to high income earners. A fairer, simpler, more ordered system, it would respect the accumulated value of savings built up in good faith under existing rules. And importantly, there would be no ill-considered tax on unrealised capital gains.

 

Tony Dillon is a freelance writer and former actuary.

 

35 Comments
Jon Kalkman
July 04, 2025

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.

Ramani
July 04, 2025

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….!

Tony Dillon
July 04, 2025

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.

John
July 04, 2025

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

Roger Ng
July 04, 2025

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.

Just Say’n
July 03, 2025

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.

JohnS
July 04, 2025

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.

John
July 04, 2025

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.

Dudley
July 04, 2025

"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.

Peter Care
July 03, 2025

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.

Geoff
July 04, 2025

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.

davidy
July 03, 2025

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).

John
July 04, 2025

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.

davo
July 03, 2025

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.

Dudley
July 03, 2025

"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.

Jude
July 03, 2025

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.

Kym
July 03, 2025

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

John
July 04, 2025

That thought had crossed my mind

Dean
July 03, 2025

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.

Old super hand
July 03, 2025

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.

James#
July 03, 2025

"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!

OldbutSane
July 03, 2025

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).

Francis H
July 03, 2025

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.

JohnS
July 03, 2025

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

Aaron
July 03, 2025

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.

billy
July 03, 2025

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

Porky
July 03, 2025

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.

Jim McMahon
July 03, 2025

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.

Dean
July 03, 2025

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.

JoanG
July 03, 2025

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...

John
July 04, 2025

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

GeorgeB
July 03, 2025

"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.

Josh
July 03, 2025

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.

Wildcat
July 03, 2025

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.

philip - perth
July 04, 2025

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'...

 

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