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For most of this year, Labor had been resolute on the most contentious parts of its super tax proposal – namely, the lack of indexation and taxing unrealized capital gains.
That all changed this week as the government announced several changes to the tax.
Here are the key details:
- The $3 million threshold will still exist, but there will also be a new threshold of $10 million.
- Earnings on super balances between $3 million to $10 million will be taxed at 30%, and beyond $10 million at 40%. The tax on balances in the accumulation phase under $3 million will remain at 15%.
- The $3 million and $10 million thresholds will be indexed in line with the CPI in $150,000 and $500,000 increments respectively.
- There will be no unrealised capital gains tax, with only realised gains and earnings taxed.
- The implementation of the tax will be delayed by one year until July 2026.
- The Low Income Superannuation Tax Offset (LISTO) eligibility cap will be raised from $37,000 to $45,000 and the maximum payment lifted from $500 to $810, taking effect from 1 July 2027.
How the new tax will work
So, how will earnings on super balances be calculated? It will be up to the super funds to work out these earnings and the ATO will contact the funds on those subject to the higher taxes.
The earnings amount will be “based on its [the Fund’s] taxable income” and calculations will be “closely aligned to existing tax concepts”.
There will be room for funds to calculate what’s fair and reasonable rather than an exact amount for each individual member.
And now there won’t be the need to include unrealised capital gains in these earnings.
SMSF expert, Meg Heffron, gives the following hypothetical example of how the tax will work in practice:
“James has $15m in super at 30 June 2027. That means:
- 80% of his super is over $3m ($15m - $3m is $12m. That’s 80% of his total super balance of $15m), and
- 33.33% of his super is over $10m ($15m - $10m is $5m. That’s 33.33% of his total super balance of $15m).
During the year his super earned a combination of income and his fund also realised some capital gains. The “share” of this attributed to James is $500,000. The fund has already paid 15% tax on all of its taxable income. In addition, James would receive a Division 296 tax bill.
It would be:
15% x 80% x $500,000 + 10% x 33.33% x $500,000 = $76,665.”
A welcome relief
We canvassed the views of six experts who’ve contributed articles on the tax to Firstlinks over the past year – Meg Heffron, Jon Kalkman, Harry Chemay, David Knox, Tony Dillon and Ron Bird.
Most of our experts have welcomed the proposed tax changes. The general feeling is one of relief. As former actuary Tony Dillon says: “This was a tax that in its early form proved to be a bridge too far. Sanity has prevailed.”
Dillon thinks the dropping off the unrealized capital gains tax is the biggest win:
“Unprecedented in Australia, it was a flawed concept. A tax on changes in asset values, it was effectively a wealth tax under another name. Assets that have risen on paper are not “earnings” and could have forced asset sales to pay the tax. It was overreach and there was real concern that if implemented, such a tax could have extended beyond super. It was economically imprudent.”
Meg Heffron agrees:
“This is a better design. Taxing unrealised capital gains put people in the invidious position of receiving a tax bill when they didn’t necessarily have the cash to pay for it. That was fundamentally flawed”.
Harry Chemay, Principal at Credere Consulting Services, is happy that indexing has now been included.
“I had openly stated a preference for indexing, noting that it was a key component of the Reasonable Benefit Limit (RBL) system in place from 1990 to 30 June 2007, a measure that had previously constrained tax revenue leakage from the super system by high balance members,” he says.
Former Mercer Senior Partner Dr. David Knox has a different view. He believes the most important change is the extension to LISTO:
“This was long overdue and many of us have been recommending this change for some years. Its importance has been highlighted by the new income tax rates. For example, from 2027-28 the marginal rate of tax for those earning between $18,201 and $45,000 will be 14%, which is less than the 15% tax paid on an employee’s SG contribution. This would have been an unfair outcome. The extension of LISTO will improve equity and will, in a small way, reduce the gender super gap.”
The undoubted ‘losers’ from the announcement are those with super balances above $10 million. It will impact around 8,000 people.
Dillon reckons the $10 million threshold “seems arbitrary” and those affected may respond by restructuring out of super into other vehicles.
Knox says that while people with larger super balances won’t be happy with the additional tax, “these changes represent appropriate additional support for low income earners without removing all the concessions received by those with very large super balances.”
Wrinkles in the proposal
Our experts have highlighted parts of the latest announcement that still need further clarification.
Meg Heffron says she’s unsure whether the new definition of earnings will entail just gains that build up in the future (after 1 July 2026) and are realised in the future, or all gains that are realized in future, regardless of whether they built up before or after 1July 2026.
She also has questions about how the discounting of capital gains will be calculated. Typically, super funds don’t pay tax on the whole capital gain when they sell assets owned for more than a year – there is a discount of 1/3rd. Whether this discount remains is unclear.
In addition, Heffron says we’ll have to wait for the legislation to be tabled to see how it treats members with more than $3 million or $10 million in super who have pensions. Normally, there’s a reduction in their fund’s taxable income due to some of the income – including realized capital gains – being exempt from tax. She wonders how the government will allow for that.
Meantime, former Australian Investors Association Director Jon Kalkman suggests the new proposal will create a whole new accounting problem for super funds:
“Until now, the fund member never pays personal tax on their superannuation account. The super fund is the owner of the asset that earns the investment return. The super fund pays the tax on behalf of members and that tax is reflected in the unit prices paid by all members as they switch investment options on a daily basis.
This new proposal … would mean that the fund, as the taxpayer, will need to pay additional tax but only on behalf of some members with high balances and that would mean that the same units have different prices depending on the member’s balance. That makes switching investment options impossible.
If super funds are going to account for real earnings from actual fund income and the proceeds of asset sales, as this new proposal suggests, and then apportion those earnings to individual members accounts, they then need to also calculate each member’s portion of the fund’s tax obligation. In an industry fund with multiple investment options and thousands of members who can switch between those options at will, that has never been done before.
In an SMSF, it is very easy. There are no more than 6 members and they are all in the same investment option together, so they are not trading assets with each other. It is very easy to determine each member’s proportion of the fund’s tax obligation.”
Kalkman is interested in seeing how the government resolves this issue.
The end result
Labor’s backdown on the super tax will result in lower government revenues than previously projected. Treasurer Jim Chalmers says the net effect of the changes on the budget is about $4.2 billion over the forward estimates – a large part of which is due to the one-year delay in implementing the tax.
That shouldn’t be taken as gospel though given, as Tony Dillon suggests, the previous government estimates were likely inflated as the prior tax proposal would have seen more of the wealthy exit super than expected.
And Chemay believes the legislation will still lead to higher tax administration costs for all taxpayers:
“… there is no free lunch here. Of the approximately 90,000 members that will be impacted by the Div 296 tax, Treasury estimates that some 33% are in APRA-regulated funds. The system changes required by these funds to ‘undertake calculation of earnings and the share attributable to in-scope individuals’ will not be trivial. Far from it.
The ATO, gathering this information from (potentially) multiple funds for ‘in-scope’ members to then calculate the applicable Div 296 tax for balances over $3 million and $10 million, will also face increased resource and systems pressures. The result of these newly announced changes will thus be in lowered tax revenue and higher tax administration costs for all taxpayers, irrespective of whether they ever attain a ‘lower threshold’ total superannuation balance of $3 million (as indexed).”
Does this make for a better superannuation system?
Most of our experts believe the changes will result in a stronger and fairer super system. Tony Dillon says the changes, if combined with a commitment to end the tinkering with super taxation “would add stability to the system, engendering predictability and confidence.”
Emeritus Professor Ron Bird is the one outlier to the positivity towards the tax changes. He says the super tax concessions still overwhelmingly favours the rich over the poor. Prior to the current changes, the tax concessions on super amounted to $50 billion a year, while mandatory super only saved the aged pension an estimated $10 billion a year. Professor Bird sees that’s a bad deal for taxpayers overall:
“The question of whether you think that the change is a good idea comes down to where you stand on the government handing out tax subsidies equivalent to about 7% of the total budget to encourage the wealthy to accumulate savings well in excess of what they will ever need. I guess that if you are one of these wealthy or your livelihood depends upon servicing these wealthy, then the answer is quite simple and therein lies the problem.”
Professor Bird says current problems with the system stem back to the Howard government’s decision to remove the reasonable benefit limits (RBLs) in 2007, which removed the tax-free benefits that could be drawn from the scheme in retirement.
As for a solution, he’s previously written in Firstlinks that it’s obvious: “reduce or eliminate the tax subsidies and/or redirect them to those in greater need.”
The obvious rejoinder to this is that there needs to be an incentive for making people part of their salaries into super.
Without putting words in their mouths, I get the feeling that most of our other experts would prefer the super system now be left alone rather than further tinkered with.
James Gruber is Editor of Firstlinks.
* Thanks to our six experts:
Meg Heffron is the Managing Director of Heffron SMSF Solutions, a sponsor of Firstlinks.
Harry Chemay is a Principal at Credere Consulting Services, and a co-founder of Lumisara.com.au.
Dr David Knox is an actuary and has recently retired from being a Senior Partner at Mercer.
Jon Kalkman is a former Director of the Australian Investors Association.
Emeritus Professor Ron Bird (ANU) is a finance and economics academic and former fund manager.
Tony Dillon is a freelance writer and former actuary.