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Meg on SMSFs: Withdrawing assets ahead of the $3m super tax

I know opinion is divided on the ALP’s intention to introduce a new tax on those with more than $3 million in super. In one corner, we have those who (rightly) point out that today, $3 million is quite a lot of money and super gets a lot of expensive tax concessions. In the opposite corner, we have those railing against the unfair calculation method – also rightly in my opinion.

While I have nothing new to add to this debate, I have been thinking about another aspect – the mechanics for those withdrawing money from their SMSF if they wish to avoid or at least reduce the tax.

On that front there are a few interesting issues to think about.

Meeting the legal requirements

First, and this is perhaps an obvious point, anyone who wants to take money out of super can only do so if they’ve met a condition of release. Most people impacted by this tax are over 65 so it’s not a problem for them. Anyone between 60 and 65 would generally need to argue they’ve retired in a superannuation sense (and unfortunately those under 60 are pretty much stuck). It does beg the question – will we see a flurry of retirements? Perhaps not. A quirky aspect of super law is that ‘retirement’ doesn’t always mean giving up work forever.

Simply quitting a paid job after 60 is enough to give full access to whatever super has built up to that point. It’s a shame we don’t have a census or election coming up because those are excellent ways of taking on legitimate short-term employment that ends. But it can be achieved in other ways as well – any short-term job will do, as long as it’s a real one. Don’t expect to ‘retire’ by getting paid for looking after your grandchildren for a bit and then stopping. Even popping back in to work for the family business you handed over years ago would be problematic if it was a manufactured position. But doing a real job for real ‘gain and reward’ (ie, a salary with tax withheld and super etc) and then ending it (a proper termination with annual leave – if applicable – paid out) does the trick.

It's also worth noting that people over 60 who’ve had paid employment in the past that’s ended (even a casual job at Coles in their teens) can also retire simply by ‘winding back a lot’. Anyone in this position who is now working less than 10 hours per week and can honestly, hand on heart, say they never intend to do more than this in terms of paid work in the future can be considered retired. But again, it has to be true. Pretending your high flying, full time, highly paid job can now be done in a day and a half per week would be unwise.

Benefiting from the super tax rules

The next issue of course is to sell or transfer assets to get money out of super. For many people with large SMSFs, this is often a property asset that will be transferred to another family member or entity.

One of the happiest groups in this whole debacle will definitely be State Governments collecting an unexpected windfall in stamp duties as families move their assets around!

But when it comes to the super fund’s tax treatment, this is curiously one area where SMSFs have an unexpected advantage.

Inevitably, any large payments out of super in response to this tax will usually come from a member’s accumulation account rather than their pension.

In an SMSF, we’re fortunate in that pension funds pay capital gains tax on a ‘proportionate’ basis. In other words, even though we know the asset being sold or transferred is going to reduce the member’s accumulation account, the capital gain still gets taxed as if a proportion of it was coming from a pension account.

Consider this example: Lilly has $5 million in super – a $2 million pension and $3 million accumulation account in her SMSF. She’s the only member.

She intends to withdraw $2 million from her accumulation account to get her balance down to around $3 million. Even though she knows she doesn’t actually have to take any action until 30 June 2026 (the first date her balance will be checked against $3 million for this tax), she wants to do it as soon as possible.

To get the money out of super, she’ll sell some assets in her SMSF and realise a $300,000 capital gain. Her fund has a pension so each year it gets an actuarial certificate that provides an important percentage: this is the proportion of the investment income that is exempt from tax. Her actuarial certificate for 2024/25 says that the magic number is 40%. (While I would love to say we actuaries do very complex maths to work this out, in fact we don’t. It’s basically: what’s the average pension balance over the year vs the average balance of the fund as a whole? In Lilly’s case, if nothing much has changed this year, her pension of around $2 million represents around 40% of her $5 million fund).

The beauty of this calculation is that even though Lilly’s fund is selling assets to take money out of her accumulation account, the capital gain she realises in the process is still 40% exempt from tax. Only the remaining 60% ($180,000 being 60% of $300,000) is subject to tax. Super funds get to discount their gain by one third so the fund would only pay $18,000 tax on this sale.

That wouldn’t happen in a non SMSF – any capital gains realised on money taken from her accumulation account would all be taxed. The tax bill would be more like $30,000 (ie 15% tax on 2/3rds of the capital gain).

Of course, this ‘proportioning’ approach for funds like Lilly’s has downsides too. She can’t choose to specifically sell ‘pension’ assets and have those realised CGT free. But it does seem to be a quirky SMSF benefit in this particular scenario.

Watch the timing

I’ve written before about one extra consideration Lilly should keep in mind.

Her actuarial percentage for 2024/25 is likely to be around 40% even if she withdraws a lot of money out of her accumulation account ‘now’ (June 2025). That’s because something happening right at the end of the year doesn’t change the average over the whole year very much.

But think about her fund’s percentage in 2025/26. It will be closer to 66% (her $2 million pension will remain, but the total fund will now only be around $3 million). It would be much better for Lilly to have that higher percentage when her capital gains are being realised!

Believe it or not she could achieve this if she held off taking any action for a month or so. If she sells assets and transfers money out of super in July 2025 (rather than June 2025), the $300,000 capital gain will be taxed based on her actuarial percentage for 2025/26. This will be around 66% because for most of the year her fund will only have $3 million. In other words, only around $100,000 of the $300,000 capital gain would be taxed ($300,000 less 66%). This time, the tax bill would be around $10,000.

 

Meg Heffron is the Managing Director of Heffron SMSF Solutions, a sponsor of Firstlinks. This is general information only and it does not constitute any recommendation or advice. It does not consider any personal circumstances and is based on an understanding of relevant rules and legislation at the time of writing.

For more articles and papers from Heffron, please click here.

 

28 Comments
Dee
June 07, 2025

One point that is not being mentioned in this debate is that most of the money in SMSFs is post tax income. We have already paid tax (at 47% plus medicare levy so 48.5%) on it then it was taxed again when being put into super at 15%. So our same money has been taxed 63.5% so far.
Our savings in super mean we don't get any government benefits, and we have private health insurance so the government won't need to spend on health and aged care for us in the late stages of our lives.
Don't tell me that we are getting a free ride on the taxpayers!

Had Enough
June 06, 2025

Apparently, I’m rich because I have over 3 Million in Superannuation.

I have accumulated such a sum because salary sacrificing over a long time into super has been the only way we could save. When I say sacrifice – I mean sacrifice – we sacrificed our current living for the future, seems we were sucked into sacrificing too much because we’ve never been able to afford a house. Too busy raising children one of whom had issues that had work and financial impacts to ever be able to do anything more than rent and live pay check to pay check with the salary that hit the bank account. At least we thought we were covered long term by our super sacrifices.

I feel like a persecuted minority in how a lot of people talk about this latest change to super and that I don’t matter because apparently I belong to just .5% of the population or whatever it is supposed to be and am fair game. Actually, I probably represent an even smaller % of the population because I am not of an age where I am able to remove the funds that will be subject to these changes. Seems I am also not allowed to even up the balance with the wife either. Well stuff them, death is a condition of release and life has been hard enough that I will not sit by and see the government take even more, take our dream of finally escaping the misery of renting.

They think they are just playing politics of envy, but they are really playing with people’s lives.

For Christ sake if you are going to break the promise of beneficial tax treatment after we have sacrificed for so long and make it punitive via taxing unrealized gains then at least do the moral thing and give a condition of release.

Really had a gut full – It's getting too hard.

Dudley
June 06, 2025

"not of an age where I am able to remove the funds that will be subject to these changes":
Have to have a large change in balance to pay much Div 296 tax.

Super contributions are optional for sole traders.

Which comes first?:
. Save enough cash to buy home.
. Condition of release of super.

Manoj Abichandani
June 06, 2025

Hi Had Enough

I have an idea for you - if you want to even up your super balance with your wife.
Just divorce her - get a court order and give her the super she deserves.

Last time I checked - there is no law stopping you to marry the same women again!!
Hopefully then you will be out and the rest of us are still here - we now have to solve problems for 79,999 !!

Steve
June 06, 2025

You are allowed $3M per person, so $6M for a couple before the new tax is an issue. Honestly you are not going to get much sympathy crying hard done by if you have in excess of $6M as a couple, or even $3M as an individual. 30% tax is still way lower than the marginal bracket you are likely to be in to have this much. And of course a principal place of residence is a great tax option - no capital gains tax. Why are you still renting? Have you sought some kind of financial advice? I do get the politics of envy, and taxing unrealised gains is truly heinous, but you need to accept someone in your position needs to pay something, and 30% is not out of line. Maybe you need to recalibrate your expectations and sense of entitlement.

Vee
June 06, 2025

The tax on unrealised capital gains ends up being more than the 15% already paid, sometimes more than twice that amount or more. So it's not 30% tax mate, but potentially over 50% tax, payable in cash that potentially does not exist.
Use Manoj's idea. I heard that one many years ago and it will work. Then get the house and remarry the girl.

John Hill
June 06, 2025

Had Enough

If you are over the cap but not by much you will not pay very much tax because of the way it is calculated . It is not 15 % on increases in value over $3million as reported in the media. Read the column by John Wasiliev in the Fin Review of 31 May- 1 June where he gives an example of earnings of $180k on top of a $3 million balance. The new DIV 296 tax was $1528. Not 15 %, but 1.5 %.
I agree it is not right for Governments to change the goal posts but that is what we must expect with super. Both sides do it so we must live with it.

It is also possible to withdraw funds before retirement . I am not sure if that would extend to funds to buy a house but a financial adviser might help.

Herman
June 06, 2025

Well said. What a pathetic Chalmers response, it only affects .05% of Super funds so 80,000 people don’t matter? This is bad policy even if it affects 10 people. Since when does the number of people affected by a bad political decision render it justifiable? Only in Chalmers eyes. The unrealized capital gains tax is just the start of Labor coming after your money.

GeorgeB
June 06, 2025

“it only affects 0.5% of Super funds so 80,000 people don’t matter? This is bad policy even if it affects 10 people. Since when does the number of people affected by a bad political decision render it justifiable?”

Totally agree that this is an utterly pathetic reason to justify one of the worst laws in living memory and is an outright insult to those same 80,000 people. Confiscating the wealth of the top 10 or 100 people in the county would affect an even smaller percentage but that wouldn’t justify it or make it right.

The proposal to tax unrealized gains will look only at the “traded value” of assets such as shares on two particular days but those values can change dramatically in the space of a few days eg. BEN shares traded over $13 in mid-February but were only worth only $11 two days later and little more than $10 in early April.

So the question for our esteemed Treasurer is: what is the fair value of the asset for the purpose of paying the proposed tax bearing in mind that the value may drop dramatically between 30 June and the date that the tax is due to be paid, and there is no mechanism for obtaining a refund even if the shares never recover.

Dean Tipping
June 05, 2025

The taxing of unrealised gains is socialism writ large and straight out of the Bernie Saunders and Jeremy Corbyn play book. It is disgusting, and nothing but anti-aspirational. It is un-Australian... and I believe it is the thin edge of the wedge that will not stop there especially given the Greens effectively control the Senate, and we know how Marxist they are.

I am a qualified accountant and financial adviser and sorry, I've had a gutful of this nonsense. How about the government address the 'debit' side of the ledger for a change.

Over the lifetime of super, concessional contributions are taxed at 15%... in accumulation, the tax rate is 15%... a 15% tax rate applies to those accounts above the Transfer Balance Cap (TBC) of $2M from July 1... and now there is the proposed doubling the tax rate to 30% on those accounts with a balance above $3M and to include unrealised gains in that calculation.

But wait... there's more!!!

To thank the country for your service, a 17% Death Benefits Tax' (DBT) is levied on the taxable component of a member's super account when it passes to anyone but a spouse on death of the member.

The government gets more than their fair whack out of super and to suggest otherwise is ignoring the accumulative tax rates over the lifetime of the eco-system. One cannot have confidence in this system any more.

I have 'banged-on' to clients, and anyone who will listen for years about the 'contingent asset' that sits on the government balance sheet in the form of the 17% DBT .

The treasury department, and Dr Chalmers, will know how much of the $4,200,000,000,000 in super is sitting in the taxable component that will attract DBT hence, they will be salivating at the prospect of DBT dripping into the government coffers as people meet their maker. Folks may recall that the former Assistant Treasurer, Stephen Jones referred to super as "more honey..."

I believe Dr Chalmers, in his desire to legislate a purpose of super, wants to lock that money inside the super environment for life, and not allow for any lump-sum withdrawals to be made thereby reaping the benefits of DBT.

If we conservatively estimate that 80% of the $4.2T is sitting in the taxable component, and it could very well be higher given most contributions are concessional, that means at this point in time, there is $3,360,000,000,000 that will be taxed at 17% thus extrapolating into a contingent DBT asset of $571,200,000,000... and growing!!

It's all just politics of envy. They need a dose of Charlie Munger!!

Dudley
June 05, 2025

"now there is the proposed doubling the tax rate to 30% on those accounts with a balance above $3M":
Only for those super interests with infinite balance.
A link to Explanatory Memorandum to the Div 296 Bill:
https://treasury.gov.au/sites/default/files/2023-09/c2023-443986-em.docx

For opening balance $3,100,000, closing balance $3,200,000, Div 296 tax:
= (15% * ROUNDDOWN(((3200000 - 3000000) / 3200000), 4) * (3200000 - 3100000)) / (3200000 - 3100000)
= 0.9375%

If all balance in Disbursement Accounts, nothing more to pay.

"include unrealised gains": A low blow.

Beronia99
June 06, 2025

Hi Dudley, love the Maths. The last two expressions in your formula just equate to 1.
(You're multiplying by (3.2-3.1) then dividing by (3.2-3.1) mill
Can you please do this one:
Jackie has 3.6 mill at EOFY 2025
The balance grows to 4.2 at EOFY 2026 (no contributions, just asset value growth) and then 4.3 million in 2027.
Thank you for your patience

Dudley
June 06, 2025

"The last two expressions in your formula just equate to 1. (You're multiplying by (3.2-3.1) then dividing by (3.2-3.1) mill":
Yes, clearer without the redundant terms.
Div 296 tax rate:
= (15% * ROUNDDOWN(((3200000 - 3000000) / 3200000), 4))
= 0.9375%

Close balance $4,200,000, open balance $3,600,000, Div 296 tax rate:
= (15% * ROUNDDOWN(((4200000 - 3000000) / 4200000), 4))
= 4.2855%
Tax amount:
= 4.2855% * (4200000 - 3600000)
= $25,713
Equivalent:
= (15% * ROUNDDOWN(((4200000 - 3000000) / 4200000), 4)) * (4200000 - 3600000)
= $25,713

Mark
June 06, 2025

I know that Super has many problems and taxing unrealised gains is just the latest, however, as a financial advisor you would aware that you can get around what you call the DBT by utilising a legitimate withdrawal and recontribution strategy

Manoj Abichandani
June 06, 2025

Dean

Wait there is more !!!

I did a spreadsheet where 85% (after tax on contributions) is invested and gives a return of say 6% - which is again taxed at 15% - then 85% of income is invested again - and taxed again. This is tax on income on income...

My calculation showed that if $1,000 is contributed as concessional contributions - the total tax collected by the Treasure is more than $1,000 in about 24 years based on average returns on income on income = Due to preservation rules - remember we cannot pull out any income.

Hence, my point is whatever you contribued 24 years back will simply - 100% of it will be paid to the Treasury !!

Wait there is more !!!

If the money stays longer in Super - the tax rate is more than 100% !!
Imagine how smart was Keating !!
and how smart are preservation rules !!

Dean Tipping
June 06, 2025

Correct, Manoj... hence why over the lifetime of a member's super account the government get their fair whack. If you add up the tax rates that apply to each stage, if one goes through each stage and does not mitigate DBT, the accumulated rate of tax is 77%. And this is supposed to be a system to incentivise people to provide for their retirement!! As Charlie Munger said; "show me the incentive and I'll show you the outcome..."

Steve
June 05, 2025

Dudley,

She may have other plans for the cash withdrawal rather than banking it in her own name. If an intergenerational transfer is on the cards, she may be consider using the cash withdrawal to bequeath with "warm hands". I am sure her financial planner will be all over it.

Dudley
June 05, 2025

"may have other plans for the cash withdrawal rather than banking it in her own name":
Could improve home, or gift to someone else, perhaps to improve their home.
No tax on home nominal / imputed rent or capital gains.
Give the lot away, no more tax.
No Age Pension for 5 years.

Otherwise capital in own name earning under tax free threshold.

Johns
June 05, 2025

What would be the situation if the super was reduce in june 2026 instead of june 2025 or july 2025?

Meg Heffron
June 05, 2025

You'd have some different sums to do. Best news : you'd have a further year of superannuation tax concessions which is why many people will do exactly this (leave it in super until the end of the year). But the key point of this article is that transferring large amounts out of super "late in the year" will often result in more CGT than transferring the same amount out "early in the next year". When it comes to June 2026 v July 2026 there will be an extra calculation to do : waiting until July 2026 will mean Div 296 tax on the 2025/26 earnings. If this is a lot, it might not be waiting until July 2026 to get the better CGT result.

Paul
June 06, 2025

Don't all withdrawals during the financial year get added back to the total increase in the value of the fund for the year for purposes of the calc of this stupid tax ?
If so, then is it that wise to wait until the start of the financial year to transfer funds out of super ?

Rob
June 05, 2025

Meg - you have consistently tried to simplify the structure and the calcs of this ridiculous tax when the Finance Journos did not have a clue and constantly sprouted "a 15% tax" which it never was and never can be, so thank you. There is one thing I would add - given that the vast majority of those impacted will be >65, {well over in my case}, withdrawal from Super "reduces" the forward liability for "death taxes" and that can be a very big number - a partial offset if you like.

My personal plan was to pull all Super at 85, or a nasty health diagnosis, whichever came first - I am now thinking, at 77, a partial withdrawal to get back under the threshold, is a good plan!

Meg Heffron
June 05, 2025

You are absolutely right Rob - death benefit taxes dwarf Division 296 tax every day of the week for a lot of people. I've been expressing it like this to some clients who've had that major life event such as a diagnosis or death of a spouse : "You have previously been on the fence about taking money out of super because doing so will mean you are worse off during your lifetime but your children are better off when you die. This just changes the equation and make the personal cost to you of having less in the super environment lower." This is definitely NOT a silver lining (and the tax is poorly designed) but in some ways it makes that decision easier!

Goronwy
June 05, 2025

If the entire fund is in pension mode ( both husband and wife) I assume there is still an advantage in paying out more pension to one member in June if that persons balance will go over $3 million if they do not do this? That is when one person is going to be above the limit and one person well below.

Rob
June 05, 2025

The key date is 30/6/2026 NOT 2025. Do the sums first - it is the "proportion" that is over that is the problem - the proportion could be minimal for many, if not most people, in which case the extra tax would be minimal. Until you have modelled it out, or had it done for you, you are flying blind as to the correct strategy to minimise your overall tax

The Proportion Calcs are:

(Total Super Balance 30th June 2026 - $3m)/Total Super Balance 30th June 2026

That Proportion is then applied to "earnings"

Remember it is yet to become law!!

Meg Heffron
June 05, 2025

Goronwy - if the whole balance is in pension phase there will be different sums to do and you may find it's better to leave it in super and cop the Division 296 tax. Because you're "giving up" a nil% tax environment by taking money out of super. That said, very few people have pension balances > $3m because of the transfer balance cap. So for a lot of people impacted by this tax, the amount they will be taking out of super is coming from an accumulation balance.

BeenThereB4
June 05, 2025

A friendly retired accountant gave me guidance (not advice) that a w/drawal from Super fund (Accum account) should be noted on bank transaction to be a LUMP SUM w/drawal.

Dudley
June 05, 2025

"She intends to withdraw $2 million from her accumulation account to get her balance down to around $3 million.":

Assume nothing in personal accounts before withdrawal from Super Accumulation Accounts and 15% tax on income therein.

Tax on personal income outside super is:
0% to $31,002,
28.5% to $37,499, and,
> 30% thereafter:
https://imgur.com/a/Ezee9OV

What is the return on $2M that produces a nominal income less than $31,002?:
= 31002 / 2000000
= 1.5%
which is a waste of opportunity.

What capital produces $31,002 at a yield of 6%?:
= 31002 / 6%
= $516,700

Better off withdrawing $500,000 or so and 'Render unto Caesar that which Caesar would anyway seize'.

 

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