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How the new super tax will hit large balances

(Note that the title of this article has been changed because it is wrong to refer to the new tax as a '30% tax'. It is a completely different 15% tax. Other references to a 30% tax in this article, which is the way Treasury incorrectly describes it, have been left unchanged).

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The Government has struck a compromise in its desire to rein in the cost of tax concessions on large superannuation balances. Treasurer Jim Chalmers has announced that taxation on earnings from superannuation balances in excess of $3 million will double to 30%. The existing 15% rate on accumulation funds will continue for all super balances below $3 million. Chalmers said:

"The modest adjustment we announce today means 99.5% of Australians with superannuation accounts will continue to receive the same generous tax breaks, and the 0.5% of people with balances above $3 million will receive less generous tax breaks."

However, there is a surprise in the way the extra tax will be calculated, as outlined below. Not only will the Australian Taxation Office issue tax liability notices to individuals for the first time in the 2026-27 financial year, but earnings will include unrealised capital gains.

Although holders of large super balances will be hit by the higher tax, the fears of a hard cap forcing the removal of money from super, or the imposition of tax at the top personal marginal rate, have not been realised. The delay until after the next election also gives time for consultation and modification.   

Managing the politics

Although the Government had previously indicated it was only having a ‘conversation’ with the Australian people, it has moved quickly with an announcement in the face of growing criticism. Crucially, the attack on the Government was labelled a breach of an election promise and it raised the prospect of undermining the ‘truth and integrity’ high ground Prime Minister Anthony Albanese campaigned on successfully at the last election. Albanese was especially vulnerable after his undertaking in the May 2022 election campaign:

“We’ve said we have no intention of making any super changes. One of the things we’re doing in the election campaign is we’re making all of our policies clear.”

By postponing the effective date until after the next Federal election, due by May 2025, Labor can claim it took the policy to the people, thereby not breaking an election commitment. Chalmers will argue he has addressed some of the growing cost of superannuation concessions. On the other hand, those affected have three more tax returns at the lower rate assuming Labor wins again.

Both sides blinked at the same time and a middle ground was reached.

It’s worth noting there are many assumptions in the $48 billion estimated cost of superannuation concessions, such as the guess that earnings outside super would be taxed at the top marginal rate, whereas it is more likely that many people would find alternative ways to reduce their tax.

The new policy is expected to raise about $2 billion a year. Earlier in the debate, Chalmers suggested he preferred a cap of $3 million on the amount that can be held within super, with the rest removed. He probably wanted to avoid the spectre of increasing taxes, but it would have been an inferior approach. Imposing a $3 million cap would have required the removal of money from superannuation, creating a range of complexities such as forced sales of illiquid assets and realising capital gains in a tax event.

How will the new tax work?

Treasury has issued a Fact Sheet on how the tax will be calculated, based on the increase in individual balances rather than imposing a tax on a super fund. There remains no limit on the size of account balances in the accumulation phase.

Each person will have a Total Superannuation Balance (TSB) and those with over $3 million at the end of a financial year will be subject to a tax of 15% on earnings. Earnings will be calculated using the difference between the TSB at the start and end of consecutive financial years, adjusted for withdrawals and contributions.

Using the same treatment as adopted for Division 293 Tax (the extra tax paid on super contributions where income exceeds $250,000), individuals can choose whether to pay the tax from their super or from other resources. The new tax does not form part of a personal income tax return, and the limit is per person, not per fund such as an SMSF.

Treasury summarises the calculation as:

Tax Liability = 15% x Earnings x Proportion of Earnings over $3 million

The tax liability is calculated at 15% because earnings in accumulation are already taxed at 15%, and this is an additional tax.

It's easier to understand with their worked examples. The surprise is that earnings include unrealised gains and losses. TSBs will be tested for the first time on 30 June 2026 with tax liability notices issued in 2026-27.

Treasury's example on a balance exceeding $3 million

- Warren is 52 with $4 million in superannuation at 30 June 2025. He makes no contributions or withdrawals. By 30 June 2026 his balance has grown to $4.5 million.

- Warren’s calculated earnings are $4.5 million - $4 million = $500,000.

- His proportion of earnings corresponding to funds above $3 million is ($4.5 million - $3 million) ÷ $4.5 million = 33%

- His tax liability for 2025-26 is 15% × $500,000 × 33% = $24,750

Note that this is the extra tax, the additional amount above the tax that Warren would currently pay. That's where the estimated $2 billion in revenue comes from.

Treasury's example on the earnings calculation

- Carlos is 69 and retired. His SMSF has a superannuation balance of $9 million on 30 June 2025, which grows to $10 million on 30 June 2026. He draws down $150,000 during the year and makes no additional contributions to the fund.

- Carlos’s calculated earnings are: $10 million - $9 million + $150,000 = $1.15 million

- His proportion of earnings corresponding to funds above $3 million is ($10 million - $3 million) ÷ $10 million = 70%

- Therefore, his tax liability for 2025-26 is 15% × $1.15 million × 70% = $120,750

Again, this is an additional tax, not the full tax. Anyone with multiple super funds, such as an SMSF, retail fund or industry fund, can elect where the extra tax is paid from.

Treasury example of a carry-forward loss

- Dave is 70 and has two APRA-regulated funds and one SMSF. At 30 June 2025, his TSB across all funds was $7 million. During 2025-26, he withdraws $400,000 from his SMSF and makes no contributions. At 30 June 2026, his TSB across all funds is $6 million.

- This means Dave’s calculated earnings are $6 million - $7 million + $400,000 = minus $600,000.

- His proportion of earnings corresponding to funds above $3 million is ($6 million - $3 million) ÷ $6 million = 50%.

- The earnings loss attributable to the excess balance is $300,000. Dave can carry forward the $300,000 to offset future excess balance earnings.

- At 30 June 2027, Dave’s funds make earnings on his excess superannuation balance of $650,000. He carries forward the earnings losses attributable to his excess balance at 30 June 2026 of $300,000 and is only liable to pay the tax on $350,000 of earnings.

- This means his tax liability for 2026-27 is 15% × $350,000 = $52,500. (Treasury's example incorrectly says $52,000)

Although it is another level of complexity, this method was chosen because funds do not currently calculate taxable earnings at an individual member level, and a method was needed to identify taxable earnings for members with balances over $3 million.

The major sting here is the inclusion of unrealised capital gains. For example, many investors in startup companies hold the asset in their SMSF, and such companies often face dramatic swings in valuations based on the last funding round. A member may enjoy a large valuation upswing on which tax is payable without receiving any actual cash, only to see the value fall the following year. The same applies for an SMSF holding a large equity allocation which rises one year and gives back the next.  

There was no statement about whether people with over $3 million in super can stop new Superannuation Guarantee contributions from their employer and take a higher salary instead. Someone earning less than $45,000 incurs a marginal tax rate of only 19% and might prefer to invest outside super and avoid the 30% tax rate. The lack of indexing in the $3 million is inappropriate and will be a major point of contention.

The Treasury fact sheet is here.

Alternatives, politics and unrealised gains tax

Now watch for articles on alternatives to holding large amounts in super. The case for investing more in a family home, transferring super to a lower-balance spouse or family trusts just received a boost, as did the financial advice industry.

The politics has a long way to play out before the new tax rate hits the bank accounts of large super holders, and it’s likely the Coalition at the 2025 election will argue ‘typical Labor’ with tax increases to ‘pay for their spending’. Chalmers and Albanese will need to persuade voters that it is the right policy to reduce the cost of super. The Prime Minister gave a hint of what is to come when he said:

“If they (the Coalition partners) want to vote against this change and try and prevent this change, then they can explain to people why they’re not prepared to back energy bill relief for pensioners ... but they are prepared to go to war for the one half of 1% of people with more than $3 million of superannuation in their accounts.”

The taxation of unrealised capital gains is the shock and the part of the policy likely to drive the most resistance and opposition. It will push some money out of super as many investors currently use their SMSF to hold growth assets with realised capital gains bumped far into the future.  

The objective of super is next

Labor has yet to make a firm undertaking that there will be no further changes to superannuation. Yesterday, Jim Chalmers even refused to rule out capital gains on the family home, before Albanese quickly jumped in and corrected him.

For example, what might happen to lump sum withdrawals? The Government intends to legislate an objective of superannuation as follows:

Lump sum withdrawals seem incompatible with the objective. Under current arrangements, someone can withdraw all their superannuation on attaining one of the many ‘Conditions of Release’, such as reaching the age of 65, even if they have not retired. Taking all the money out seems to breach the objective “ … to preserve savings to deliver income” in retirement. So the question is … what’s next?

Graham Hand is Editor-at-Large for Firstlinks. This article is general information.

 

184 Comments
Dr David Arelette
April 09, 2023

I have read all the comments, without action it is only sound and fury. Let me quote part of MacArthur's words at the Leyte gulf landings Rise and Strike. Strike at any favourable time. For your homes and hearths strike. For the generations of your sons and daughters, strike. Let every arm be steeled. Chalmers will only see many trillion dollars exiting Australia, flowing out as the reason to surrender. Do not complain, strike. 

Lawson
March 07, 2023

Thanks Graham for your article and the opportunity to discuss and ask questions......I am one of the lucky ones by way of balance and whilst encouraged to save for my future and keep to the rules understand those rules have led to excess in accumulation accounts which should be bought back in to line with company tax rates of 30% so are fine with that......The unfair aspect is the taxing of unrealised capital gains which over the 30 years of my fund are now very large (fortunate I know) but with no intention of selling we are being forced to pay 20% CGT and in my case without the cash to pay.......It is clear the Government no longer wants the accumulation funds to be part of estate planning which again is OK but rather than be trapped and tricked in paying tax before it is due we should be able to transfer assets out of super and back in to the normal system maintaining our original cost bases as would an inheritance......this would be fair and the tax would be paid as always after any sale.......Otherwise the government has broken it's contract with the public and has tricked,trapped,and stolen 20% of the gains well before they are due.......If you form any lobby group to Government I think this is the really big issue......I have always played by the rules and paid my taxes (47%) and whilst that is too high by any standard the stealing of taxing unrealised capital gain takes the cake

Geoff R
March 08, 2023

Hi Lawson

just to be clear the extra tax on capital gains will only apply to future gains and will not apply to gains that might have occurred over the past 30 (or any) years.

it makes no difference if your property was bought say 2 years ago or 20 years ago. You already need to value any property in Super every year and this valuation contributes to your TSB. It will be the movement of this TSB that will be taxed at 15% on the proportion over $3m.

so you can relax a bit not having to worry about any increase in tax on unrealized capital gains that have occurred in the past.

Lawson
March 08, 2023

Thanks Geoff,......That does make it a bit better but I think the spirit of having accumulation funds within super is now well and truly broken and the taxing of unrealised gains is the a clear message it is time to remove funds....Super has just got far too complicated and has become a very divisive issue as so many comments here show.

Grant
March 07, 2023

The TSB threshold should be different for singles and couples, as with pension assets and income tests.

Currently, couples can keep their individual TSB below the 3mill threshold, however, should one pass away and their TSB is transferred to the surviving partner, it could exceed 3mill, which is what happened me. All of a sudden the surviving partners tax bill will increase significantly more than their reduction in their cost of living.

Bruce
March 07, 2023

Dear All
I really feel there is a generally common theme of self entitlement from people with money. The tax system has changed under both major parties over the years. It will continue to change. For the "wealthy" super is a massive tax minimisation scheme. It will continue to change...even under the libs, if relected, as they will soon need to get the courage to deal with this. Plan accordingly.

Bill Green
March 14, 2023

You are missing the point Bruce. The Australian public were encouraged to get off the pension by being forced to channel part of their income into super from the 80s. Once there the funds were locked away for 40 years +
. The tax incentives were the encouragement to put even more money into super. All good until the contract with the investors was breached as in this case, no financial institution would be allowed to just throw the terms of a long running contact out like this, they would be prosecuted by ASIC. Even worse how can democracy work when parties can cynically lie before an election, when voters are making decisions on lies. Its a disgrace.

john
March 07, 2023

Graham
If I have a loss in year1 and then in year2 the balance returns to the original amount and no contributions or withdrawals should the c/f loss cover the tax in the 2nd year?
My spreadsheet could be wrong but it works for all examples provided

year 1:

Step 1 Calc earnings
TSB current FY 5,000,000.00
- TSB previous FY -6,000,000.00
+ Withdrawals -
- Net Contributions -

Earnings -1,000,000.00

Step 2 Calc proportion of earnings above threshold
Balance above 2,000,000.00
Proportion of earnings 0.40
Earnings on excess balance -400,000.00

Step 3 Calc Tax liability

Earnings -1,000,000.00
Proportion of earnings 0.40

C/F Loss -400,000.00

Year 2
Step 1 Calc earnings
TSB current FY 6,000,000.00
- TSB previous FY -5,000,000.00
+ Withdrawals -
- Net Contributions -

Earnings 1,000,000.00


Step 2 Calc proportion of earnings above threshold
Balance above 3,000,000.00
Proportion of earnings 0.50
Earnings on excess balance 500,000.00


Step 3 Calc Tax liability
Tax Loss current year No
Tax Rate 0.15
Earnings 1,000,000.00
Proportion of earnings 0.50
Earnings on excess balance 500,000.00
- Previous years Loss -400,000.00
Taxable amount 100,000.00

Additional Tax Liability 15,000.00

Bill
March 07, 2023

Since when is the doubling of a tax considered as a "moderate" change.

Chris Capell
March 06, 2023

I briefly read that the balance is the concessional balance to arrive at the $3m. I have no other information, but wonder if they include both the concessional and non-concessional balance. I think here is more to be said on this one.

Graham Hand
March 06, 2023

Hi Chris, in the calculation, it is the Total Super Balance, everything an individual holds in super. It does not matter if the original source was concessional or non-concessional.

dungfungus
March 06, 2023

That example given for Carlos is a bit dodgy. At 69yo he is required to drawdown annually at least 5% of his SMSF balance which would be $450,000, not $150,000.

Dudley
March 06, 2023

'superannuation balance of $9 million on 30 June 2025 ... draws down $150,000 during the year':
"required to drawdown annually at least 5% of his SMSF balance":

Only required to withdraw 5% of Disbursement ('pension') accounts, assuming withdrw minimum required:
= $150,000 / 5%
= $3,000,000

- Carlos’s calculated earnings are: $10 million - $9 million + $150,000 = $1.15 million

Taxy
March 09, 2023

Carlos most likely only has $1.7 Million in pension phase, due to the Transfer Balance Cap.

5% of $1.7 Million is the minimum pension requirement.

GM
March 06, 2023

As to how in the longer run people respond to this announcement suggests to invest even more heavily in your home because it is likely to remain safe from attack but be sure to pay off your mortgage before you think of retiring because you can’t generate lump sums when you might wish to. The implication of all this is to drive up house prices ever further and keeping the young even further from their first homes.

But if you invest in houses for rent (allaying a current rental crisis)there is also a significant prospect of negative gearing coming under attack (a distinct disincentive to invest in property), so then invest in blue chip companies paying franked dividends (but there is also a campaign to bring in constraints on companies using franked credits in capital raisings, a by-product of which will be the cost of capital increases, so “greedy” companies will need to aim for even higher returns to not encourage investors to move more of their investments offshore).

The contra idea that government will create attractive co-investment opportunities for funds to invest in “socially and ethically” responsible, nation building projects like social housing might roll off the lips of politicians but profitable, efficient government businesses are an oxymoron.

Hawke and Keating and Howard and Costello had market-based reform frameworks that were internally consistent; this lot has contradictory impacts at every turn.

Garry
March 06, 2023

The aspect that doesn’t receive enough focus is that the assessment of asset values including unrealised capital gains of illiquid/fixed assets seems to have been decided by the government to be in the hands of the ATO? With this new tax in prospect and with the ATO potentially both assessor and arbiter, I see many bitter, expensive battles ahead. Assets like farms or businesses premises bought years ago where there is a mile wide view on what these are worth are going to be particularly vexatious. And how values move from year to year is equally uncertain, along with the capacity of asset rich-income poor to pay taxes assessed. Surely the ATO cannot have all power and no obligation regarding being competent to assess values and to be fair and impartial?

SMSF Trustee
March 14, 2023

How Garry? The ATO knows your Total super balance because your fund or funds reports to the ATO how much you've got on a regular basis. They add up your funds (if you have more than one) and calculate the change between last year and this year then send you a bill for 15%.
Not much particular competence required- certainly far less than they have to calculate how much income tax you have to.pay each year! Or how much tax your fund already has to pay bases on contributions and earnings.
If your fund isn't reporting an accurate figure for fund value to the ATO already then your fund has a problem!

davidy
March 06, 2023

I wonder what the stats are for super balances over $3m which are in industry/non SMSF funds - are these over $3m balances all/majority held in SMSFs hence the basic approach being taken by the ATO to calculate 'earnings' ?

So the industry funds stay quiet and let the SMSF members do all the bleating against the new policy.

Fund Board member
March 06, 2023

davidy, as a Board member of one such fund I can say that the answer is "no". We do have about the average % of members with over $3mn.
This isn't an industry fund plot. We weren't consulted specifically and many of us are also scratching our heads about the earnings measure. But glad we don't have to spend money on systems to do it!

Lyn
March 06, 2023

Fund Board member,
As a Board member, aren't you concerned that many of you are "also scratching our heads" and have not been " consulted specifically" about this measure from the foxes guarding the henhouse? Does it not bother you ( other than you being glad you don't have to spend money on systems to do it ) that as Garry's comment above yours points out so well, that the ATO will be wearing 2 hats? Is that in the best interests of your members affected?

Geoff
March 06, 2023

An interesting question may be HOW LONG it takes the ATO to assess the TSB for any particular year, and thus work out what your tax liability might be. A few years ago, when I had a finger on that pulse via working for a super fund who polled ATO details to enable lost super accounts to be found and consolidated, it was a very slow, annual, process. No idea what it's like now.

Be very difficult to work out what to do in the current FY if you're not getting a resolution to the last one for 6 months or more.

Fund Board member
March 06, 2023

Lyn,
The ATO is not wearing two hats. They oversee all tax already; they've been administering Div293 for ages; they have the data on everyone's total amount in super and they are in the best position to bill people for this tax.
That doesn't create any conflicts or complications that I can see.

Bryn
March 05, 2023

The new tax on superannuation (accumulation and pension phase) is nothing more than a sleight of hand. If you thought your pension will never be taxed this new tax trick has exploded that myth. Tax will be calculated on the change in value of the total super balance, which includes the change in pension phase investments (natural growth plus income). So a precedent has been set. If you are sitting smuggly, thinking that you are not, or will never be, impacted by this dishonesty, think again. This government will tell you whether you are the "top end of town" (remember?) not you and will penalise you accordingly.

Why do so many readers of this newsletter, presumably having worked hard and sacrificed so much for fifty years for their retirement, appear to be feeling guilty for now reaping the benefits of having done so? If they are happy to pay more tax, have they ever gone to the ATO and made voluntary payments?

This is just the beginning.

Mark
March 06, 2023

I am firmly against penalizing taxes on those at the more fortunate end of super savings. It will be a negative incentive for everybody and cut down the aspirations of everyone who thought they could look after themselves more comfortably remain independent and free of Government handouts in retirement.

Making more people dependent on the State is just another way that Socialism, nay Communism, works in controlling the masses.

But, really, taxing unrealised gains? That is a step too far!

Until a gain is realised the profit is a mythical accounting trick to assess assets and should never be used as a basis for taxes on real profits.

A profit doesn't exist until a profit exists...period!

John
March 05, 2023

The biggest issue with the proposal is the taxation of unrealised gains.

How is this for a simple solution.

1. Calculate income for the super fund as is done already.
2. Apportion that income between the amount over $3m and the amount under.
3. Tax the amount under $3m at 15%, and the amount above at 30%

A suggested basis for apportionment between under $3m and over. Take the average of the beginning and ending balances.

So for an example

Starting balance $3.5m, ending balance $4.5m, average balance is therefore $4m. therefore, one quarter of the income is taxed at 30% and three quarters at 15%.

you will need to make some adjustment to the $3m figure, where the fund is part pension. Use the transfer amount. So, if $1.6m was transferred, then the point where the apportionment takes place will change from $3m to $1.4m (ie $3m less the $1.6m).

Apportionment between tax free (pension) and taxable (accumulation) continues to be done as it is now.

To me, simple solution, and fixes the main problem (taxing of unrealised gains)

Assuming of course, we accept the $3m figure, and that it doesn't get indexed

G41
March 05, 2023

Your Comment reveals the inherent problem in this Policy. You cannot just "calculate income for the super fund" (unless it's a single member fund) because it is the members' account balances that matter. Typically, one member of a relevant SMSF will have a balance below $3m and one will have a balance above. Obviously, you can apportion between the members but then if there is a tax liability how do you apportion the franking credits and the tax losses between them without transferring value between members by exchanging cash for tax attributes?

Hari
March 07, 2023

SMSF reporting software already apportions earnings and tax between members. It’s not much of a stretch for these platforms to update their systems to adjust for the unrealised portion of the earnings, if the government do indeed decide to remove this part of the policy.

Graham Hand
March 07, 2023

John, your simple solution will not work for anyone holding their super in an insto fund (industry or retail) as they calculate the tax payment on accumulation and pension balances and adjust the unit price accordingly. But they do not know which of their members hold a balance above $3m and therefore who is liable for this new tax. Your proposal probably works for an SMSF but that does not solve the problem. Many people have both.

Ross
March 05, 2023

Chalmers seems to be pretending that as the ATO is only able to and actually calculating the TSB, therefore it has no option other than to tax the change in TSB. What rubbish. IF the ATO can calculate the TSB, then it can calculate the combined incomes of the funds that make up the TSB and tax that and leave unrealised gains out of the equation. The argument seems to be that the ATO can’t be bothered calculating combined incomes so will take the easy option of using the adjusted change in TSB. We all know, however, that the ATO has always wanted to tax unrealised incomes both inside and outside super but governments wouldn’t do it because of the political back lash. Chalmers probably thinks this a god idea as well. They now have a ready made answer to this problem which has vexed them and a new precedent has been set.

Graham Hand
March 05, 2023

Hi Luke, on your question: "Graham, can members withdraw excess super balances from the superfund by transferring asx listed shares out as ‘in specie’ or do they have to cash shares and withdraw cash?"

General not personal advice, a few points as I understand it:

1. Unless the Government changes the rules as a result of this new tax, withdrawals from super are permitted only in defined circumstances (such as a Condition of Release).
2. At the moment, an SMSF can make a pension payment using an in-specie transfer, so can't see why 'excess' super should not be treated the same (provided a release is permitted)..
3. The asset must be transferred at market value.
4. Although no cash changes hands in an in-specie transfer, it is still a tax event as it transfers ownerships from one party to another. So a capital gains or loss is triggered.

Michael
March 05, 2023

What’s the impact on Government Defined Benefit schemes if Albo retires on a $400k income stream indexed for life?

Pavel
March 05, 2023

I understand all defined benefit income streams are multiplied by 16 to give these a capital value that is then incorporated in calculations for pension caps, etc. I assume this multiplier will likely be used for the TSB calcs too?

So, a DB pension with a value of $400k p.a. would be capitalised at $6.4m of threshold calculation purposes. In which case, the PM would be over 2x the TSB cap.

OldbutSane
March 05, 2023

It seems to me that the Government has come up with the usual complicated method of solving a simple problem. Just like the Morrison Government did when they limited total superannuation balances (and pension balances) to $1.6m (it would have been simpler to just undo Costello’s changes, which only benefited the better off).

Given that no one who is currently accumulating super can exceed the now $1.7m (indexed limit), the problem could be easily solved by taking you total super balance as at 30 June (why not 2023?) and if it is over $3m, then the excess is placed into an account called Excess Funds and the earnings taxed at 30%. This balance of the Accumulation Account would then be treated like existing pension accounts (ie fixed value whether they go up or down). Any monies to be transferred to pension phase then must come out of the Accumulation Fund so the total nominal balance of the pension and accumulation funds is never more than $3m.

The only issue I can see here is if the existing pension account is significantly more or less than the persons allowed balance due to growth or withdrawals from the pension (since 2017) and how that would be treated. The simple way would be to say that you transfer cap is the amount that counts and that plus any accumulation funds cannot exceed $3m.

Therefore if someone had $1.6m in pension phase in 2017, then they could have $1.3m in accumulation phase (total $3m) and rest is in the Excess Funds Account. An actuarial certificate would then determine the percentage of income subject to both the 15% and 30% percent tax rate, just like they do now for those with pension and accumulation accounts. No indexation is required as it will only be about 5-8 years before the pension limit is $3m anyway. Seems a much simpler solution to the problem.

Irene
March 05, 2023

Can’t agree with you more, the govt is making the pension system more complicated. Your suggestion is good & I think you can do better job than the treasurer.

SMSF Trustee
March 05, 2023

That would be a very expensive way to do it for Super funds, with the systems that would have to be put in place not straightforward. That would reduce returns for all members of funds even though the target group is very small percentage. And when someone has a couple of funds, how are they going to know when their member's total goes over $3mn?
No, the ATO knows your total balance and the solution that's been designed is actually the simplest, in administration and systems terms.
It would also add a layer of administration for SMSFs that isn't necessary.

OldbutSane
March 07, 2023

This reply does not make sense. Superfunds currently distinguish between pension and accumulation funds, so why not for a third type of account, given that my suggestions refers to a point in time (not continuous) assessment of the $3m balance. People can have pension accounts and accumulation accounts in more than one retail or industry fund, so I don’t see the problem. Indeed the proposed system may be more cumbersome as someone has to add up all the balances and then sort out who pays the tax every year.

It was done when pension limits were introduced, so why can’t it be done again?

John
March 06, 2023

Agree undo the Costello changes and almost all of the govt problems disappear.
Those with big super balances must take a big pension and when they do so they will be taxed personally. Sure super doesn't get taxed but the tax is collected from the individual.

Chris
March 04, 2023

With the greatest of respect, all that I'm reading in the comments is a lot of people worrying about themselves (likely to be mostly boomers, given the lack of commentary otherwise) with little to no thought to the younger generations (Gen-X, Y or Z) who will be the REAL ones impacted by this and the associated lack of indexation, plus annual double taxing of unrealised (and then realised) gains.

Go and read "Dear Under-50 Investor" by Roger Montgomery at his website, on 6 February 2013; almost a prophecy. "Super was set up by baby boomers, for baby boomers".

James
March 05, 2023

I'd hazard a guess that it was predominantly younger generations that voted for Labor or The Greens at the last election. Buyer's remorse? Older voters are more aware of Labor's historical penchant for tax and spend and the consequential cost blowouts! Their big spending agenda (childcare, greening of all things energy) and lack of constraint in containing cost blowouts (NDIS, public service growth), as well as funding essential increases in defence, medicare and aged care have to be funded somehow. Chalmers has been at pains to point out just how much and where the biggest tax concessions are. Just wait until they work out how to attack CGT and negative gearing without losing too much skin! Write to your local MP and tell them how angry you are about this and how you'll be voting accordingly at the next election.

Geoff R
March 05, 2023

"Go and read "Dear Under-50 Investor" by Roger Montgomery at his website, on 6 February 2013; almost a prophecy. "Super was set up by baby boomers, for baby boomers"." an interesting article and I agree with much of it but it is spoilt by being very "anti boomer" - and I am really over all the anti-boomer rhetoric. I am on the cusp of Boomer and GenX and I hate all the intergenerational anger and jealousy by younger folk. 

Lyn
March 05, 2023

Chris, you're right, it is the young who will also be impacted in time and it is for this reason that many older ones are against proposed new rules, not just for themselves but for their children to receive similar tax concessions in future. If you are young-ish you should be rejoicing that so many are against it.

OldButSane
March 05, 2023

Yes, there are problems with the proposed changes and it is pretty clear that the $3m will need to be indexed at some time as the pension limit will reach that in 5-8 years and something needs to be done about taxing unrealised gains. But, given that will almost certainly be solved I don’t think that older people are complaining because it will affect their children as it probably won’t as younger people can’t get more than the pension limit into super. As long as the pension limit is still tax-free or taxed at 15% in accumulation phase, then I can’t see the problem.(In fact, the Greens proposal makes even more sense, make the limit the pension limit now).

Also re Dudley’s comment below. I suggested this in a previous post, but no need to use a company (no CGT concessions), better in your own name and when the $400k runs out, sell your house and downsize so that you still have just the lower assets limit and can get the full pension and have a buffer to meet other expenses.

Dudley
March 06, 2023

"no need to use a company (no CGT concessions)":

The best CGT concession is 100% on moving from Accumulation accounts to Disbursement ('pension') accounts.

The problem with an individual holding investments is income (CGT / dividend / yield) can be sporadic, small in one year missing out on maximum income at 0% tax rate, or large in another year resulting in high marginal tax rate (eg >= 31.5% where SAPTO income > $29,783). A private investment company provides a buffer.

Andrew Smith
March 06, 2023

Yes & no. Super was set up generations ago with baby boomer (bubble/bomb) as a symptom of the issues emerging of funding defined benefit pensions, i.e. oncoming demographic decline & increasing old age dependency ratios.

The latter is compounded by demographic decline already hitting working age cohort pre Covid -> increasing numbers of retirees as the baby boomer bubble transitions (not till mid century is when demographics balance out post baby boomer bubble).

The solution for support of retirement income from super is still some way off, due to political delays in increasing the SCG super contribution guarantee, retaining homes in the state pension assets & means test, but someone who is now approaching peak working age should expect a healthy super balance upon retirement (and a part pension if needed).

Seems like a small minority of well off are garnering media sympathy, but all ignore the majority, and coming generations who will not have the advantage of 'demographic powder' behind them, that baby boomers and oldies have had (vs. repetitive headlines blaming everything on immigration &/or population growth).

Victoria
March 04, 2023

I have just calculated how much tax I would pay if it had already been instituted.
Overall, tax on our SMSF for the 2022FY would have been almost 47%! This is way above our personal marginal rates. We have commercial property which has increased significantly of late and cash holdings which is not keeping up as an overall percentage of holdings. We will be forced to sell much sooner then we wanted as we were relying on rental income to be fully funded retirees. The rental income will not be enough to sustain both the pension income and the tax owed each year, being a tax on both taxable income and unrealised income.
And what will then happen with CGT tax on sale of the property? We will already be paying a tax on capital gain annually with this new tax.

Dudley
March 04, 2023

"our SMSF":

Assuming your living expenses are equal to Age Pension and entertainment expenses are around the return from $419,000,
Then:
1. Reduce your Age Pension Assessable Assets to around $419,000 by stuffing excess capital into home,
2. Put the $419,000 non-Assessable Assets into a private investment company to buffer income volatility,
3. Pay SAPTO gross dividends of $29,783 = $20,848.10 dividends + $8,934.90 tax refund.
4. Claim Age Pension.
Else:
...

Dudley
March 04, 2023

Err;
3. Pay SAPTO gross dividends of <= ...

robin
March 05, 2023

exactly ...whats eventually happens when you sell it ,do you get a discount because you have already paid some capital gain ? or get taxed twice ? ive got a few commercial properties in my smsf ..was in accumulation ,now planning to start a pension account ,swift funds out to buy and develop a bigger house that the gain is tax free /less land tax which is a lot ,shift other items out of super or swap them .i hope be more than happy to pay the extra 15% but not the unrealized capital gain ..whats next ...unrealized capital gain on company assets ? big companies do it ,now super ,trusts will be next then private companies ....

Mark B
March 04, 2023

It appears to me that the major issue is that Super is a long term asset for people. How much will $3M really be worth in twenty or thirty years time? Certainly reduces it's attraction of Super and I won't be encouraging my kids to increase their contributions.

Unless they index the $3M then the media should be highlighting the fact that probably 50% will become the current 0.5% by the time they retire. Look it might not be 50% but it will certainly a big percentage. My modelling suggests that my $2M balance will be affected in nine years and I have it all in pension mode!

Steve l
March 04, 2023

Think the proposal of taxing super on higher balance is wrong as the future will see large funds disappear and the way they want to do it by introducing a new form of taxation (unrealised gain) on just one area of taxed economy is unfair and an administrative nightmare but I doubt this government will change its mind .
Suggest they would be better off using a deemed rate of earnings on excess funds above 3 million as they do with determining pension eligibility amounts and probably will have to in some form in determining tax on Defined Benefit schemes
E.g deemed rate 5 % on 4 mill account balance would see deemed earnings on 1 mill excess of $50,000 and tax at 15% $7500
If your not earning the deemed rate it’s up to you to chase a better return
Surely easier and then argument is on deemed rate

Denial
March 04, 2023

"I think the $3M should be indexed"

I think it has to otherwise the transfer cap which is index will be higher that it foreseeable in the early 2030s

Amuater policy development is a shell

Tax the pension phase, what could be more progress and simply than that. Overwhelming majority won't pay a cent of tax with rebates, only the target market.

Funny how our Treasury suggests the top 20% get 50% of the tax benefit but neglected to mention that the top 20 pay 80% of ALL TAXED.

Their Govt's inability to get energy bills down is mutually exclusive to this policy. Embarrassing politics

The concessions and not equivalent to Top MTR. No one pays it and all HNW's will restructure their affairs

Allan Hart
March 04, 2023

Tax the pension phase, yes. AND reduce tax in accumulation. Gradually, but start.

The final target should be zero on accumulation and same outside super income for the pension phase.

Rhyno
March 04, 2023

While the idea itself may have some merit, it is hard enough now convincing younger people to invest for retirement, this plan will only contribute to the ideology of spend now and live life to the fullest and let the govenment pay you a pension in retirement to live on.

Lyn
March 04, 2023

Where is any merit if alienates young people against saving large balances for retirement & without tax concessions they were encouraged to expect and witnessed for their parents? Nail in coffin for labour as young labourites will remember when publicised by both parties in next election campaign and they won't be ticking the labour box. $3mill/ its' future equivalent will not be so unusual for today's young flyers to achieve, they've already shown they like to spend so presumably will want large balances to prop such spending in retirement.
If GST increased, all bear a share, time to re-visit for a period of budget repair. Interesting figures on www.transparency.gov.au, well presented chart of various tax collected 2020/21 all above budgeted revenue for 20/21. If you like figures it is interesting. A temp. GST increase for a couple of years looks like a walk in the park for any Govt from that chart. No admin cost, a few buttons to press at ATO & cheaper than a new 100 (?) person " Dept of Unrealised Gains" where extra 100 will ultimately be pensionable from tax revenue & perhaps on past performance the 100 will become 500.

Luke
March 07, 2023

Yeah, I've been trying to convince my friends and family to invest more into their super, after this change its hard to recommend it to my worst enemy.

Yes right now it only effects 0.5% of the Population (as they're already or near to retirement age)

For myself and anyone younger than me (I'm 33 this year) $3 million is a very small amount in 34 years when you take into account inflation and compound interest especially when contributing your max $27500 per year, that's sacrificing your income now only for them to take it before you retire, for me that puts me to roughly $1 mil in contributions but the average profit of 8% per year for super funds that puts me well above $3 mil.

It's those unrealised gains that will hurt the younger generation and will affect way more than 0.5%. Sure there's not that many people on $100k+ but there's certainly more than 0.5% and we're already paying our taxes, getting taxed on retirement money just for our sacrifices now just makes no sense to make additional contributions at all if we're just going to lose it later on.

that's 8% for everyone else and 6.8% for anyone above 3 mil (averages of course but that is heaps at retirement age if you're planning to live off it.)

Lyn
March 07, 2023

Luke, Good to hear young person's thought here as any impact is far away for you, my 28yr old's face a picture today when came by & asked if he'd followed this news. He hadn't,says too tired to follow news with awful hrs in $100+K job. Always felt he had labour leaning & why I asked, saw that changing once he understood figures (accounting degree but job another field). He has similar aspirations to yours & mates the same, some have partners earning same,so seems not unusual salary in age bracket.

Phil M
March 04, 2023

Some great commentary here, thanks! The examples from Treasury are provided and I get that but what happens in year two? Is the tax calculated on a new starting balance 1/7 or is it still $3m? and wouldn't that mean you could get taxed twice?? Sorry of this has already been answered?

Graham Hand
March 04, 2023

Hi Phil M, yes, new starting balance. The ATO will take the Total Super Balance at the close of each FY and compare it with the balance at the beginning of the FY, and tax (with the adjustments described) the difference.

Phil M
March 04, 2023

thanks Graham.

SN
March 04, 2023

With $ 3 million cap and two members SMSF.
A loss of a partner can trigger "Reversionary pensions".where by remaining partner total can go above $ 3 million.This will be on going and many many more members will be affected ?

Dick
March 03, 2023

SMSF Trustee is clearly correct, the way the Unrealised Gains Tax is calculated, and the complications there will be in calculation and computation, and paying cash when there is no cash flow, show that this is on a deliberate basis. 

James
March 05, 2023

If there is no cash flow on a property, doesn't that suggest there may be a property sitting not being used. If the tax is implemented, it may actually make more housing available for renting, therefore lowering demand and improving cost of living. Sounds like a good idea for all investment properties.

Peter Goerman
March 03, 2023

Having more than $3 million in a superfund is the equivalent of the old couple on a pension who bought a modest house in the 70s which is now worth several million dollars: it's a legacy problem! No-one, under the existing contribution limits (currently $27,500 before-tax and $110,000 after-tax per year) would've been able to transfer that much into their superfund. Such large balances accumulated largely through unrealised capital gains which under existing legislation are only subject to tax when realised; however, this proposed TSB calculation will make even these unrealised paper profits taxable. It's nothing but a wealth tax! Anyway, if the Government believes that $3 million is enough, then those who find themselves with balances above this cap should be allowed to withdraw any excess, even before preservation age.

If not, since the $3 million cap is not indexed, more and more people will be caught in this sleight-of-hand tax heist which is the first time in Australia's taxation history that tax is levied on unrealised profits.

What's most surprising to me is that no-one in the media, and on ABC television or radio, has picked up on this taxing of unrealised profits!

What next? On Tuesday, Anthony Albanese broke his election promise not to increase taxes on superannuation. Yesterday, Jim Chalmers opened up the idea of extending capital gains tax to the sale of the family home. When Labor runs out of money, they always come after yours.

Geoff R
March 03, 2023

"What's most surprising to me is that no-one in the media, and on ABC television or radio, has picked up on this taxing of unrealised profits!"

yes I noticed that when listening to ABC RN this morning.

the AFR (Fin Review) has mentioned it "Treasury reveals ‘terrible’ plan to tax super funds’ unrealised profit" however some of the commentary in other AFR articles is deeply flawed and demonstrates a lack of understanding about both the proposed mechanics and the fact that franking credits simply represent tax already paid.

Adam
March 03, 2023

100%

Fred Nurk
March 03, 2023

Guys, Lots of comments thanks...but does anybody have a strategy other than buying a new home/upgrading an old residence. Give an example so you are not giving personal advice, per se. 

OldbutSane
March 03, 2023

In sure the Govt has deliberately left some obvious problems in this scheme. The most obvious is the use of total super balance every year as it includes unrealised gains. Why not use a point in time system like they did for pensions and create a separate account for the amount over $3m at say 30/6/25. Also, if you just have a pension account what happens if it is already over $3m (which was $1.6m at commencement of the pension)? Is that going to be taxed and if so how? It is clear the amount will need to be indexed simply because of money declining in value over time.

Geoff R
March 03, 2023

"Also, if you just have a pension account what happens if it is already over $3m (which was $1.6m at commencement of the pension)? Is that going to be taxed and if so how?"

yes that will be taxed. Whether or not your super is in accumulation or pension mode is irrelevant for this tax. They will just look at the change in total super balance (with adjustments for contributions and withdrawals). But you only pay 15% on a percentage of the increase - based on how much your balance is over $3m. So if you have $4m then you pay 15% on 25% of the increase. For $5m it will be paid on 40%, $6m is 50% and so on.

Bruce B
March 03, 2023

So capital gain on the excess super balance is taxed at 30c/$ as it is taxed as earnings. That is how it reads.

No change to CGT they said (1/3 reduction of gain) and personal capital gains have a 50% reduction after a year.

Taxing unrealized gains has thorns.

John Wilson
March 03, 2023

I don't disagree that there should be some limitation on favoured tax treatment of super. However, if it is done via a system such as the $3m threshold, it is is critical that this be indexed to avoid capturing those comfortably well-off into the government's slush fund intended for the very rich . If someone currently has (say) $2.5m, all it takes to exceed $3m is 3 years of 6.3% pa increase even if there is no real growth..
Secondly, the increased tax on holdings above the threshold needs to be considered in conjunction with the income-dependent contributions tax and the tax on non-dependant death beneficiaries. At some point, individuals will decide they are better off leaving money outside super. The treasurer shouldn't bank on getting anywhere near as much as he expects - the smarty financial advisers will find a way!
Thirdly, using the unrealised value of an individual's super holding will create problems in funding the too-big tax in a year when there is capital growth. In, my own case, in 2020-21 we had 35% growth followed in 2021-2022 by (3%) shrinkage. The flip-flop in value and tax is diabolical for planning.
Fourthly, what the too-big tax will do is change investment strategies away from growth towards income. Is that good? It will likely mean greater investment in Australian companies and less in (say) the US.
Finally, like many couples we have reversionary pensions between me and my wife: when the first of us carks it, their accumulation amount must be removed from super; their pension holding is transferred to the survivor, who (if they are near the pension limit of $1.6m or $1.9m or whatever it is - that indexation needs to be fixed) must transfer their excess pension to either their accumulation or withdraw it from super. Under the too-big tax, the trigger will be tripped by the reversion, so reversionary pensions will likely be done away with. The effect of that will be an immediate reduction in the overall fund size and in its economic viability. Hallelujah say the industry and for-profit funds!
This proposal has not considered the real world and is half-baked.

Leon Croft
March 03, 2023

With a smsf with over $3m with two people in it are the new changes calculated on per person or the smsf itself

Graham Hand
March 03, 2023

Per person.

Leon Croft
March 03, 2023

Thanks Graham

Martin Finn
March 03, 2023

The calculation method is deeply flawed.
1. When a member's account is in retirement phase and the $1.7m cap applies, the 15% tax on income of the accumulation account is a tax on actual income (and franking credits) plus discounted realised capital gains. CGT gains are discounted because the cost base is not indexed for inflation.

2. This new 15% tax is not a tax on income (as in 1 above). It is a tax on what Treasury calls "earnings", which includes 100% of capital gains, realised and unrealised. So if investments increase in value at 7% because of inflation, 15% of 100% of that increase is taken, without any discount for inflation.

3. The method results in double taxation of capital gains, because when the investment is sold, the discounted gain of the fund is taxed in the fund without any credit given for the tax already paid under the new proposal.

John E
March 03, 2023

Double tax of capital gains is alarming. Can some experts advise whether they agree with this? Looks obvious ...
And when there is a loss, it would be nice if that could be carried back (not just forward) for a refund of tax previously paid as appropriate.

Peter
March 03, 2023

While we were all busily arguing at what amount to cap future super balances and whether to tax the excess or force superannuants to withdraw it, Labor slipped in the real tax heist. Since the $3 million cap is not indexed, more and more people will be caught in this sleight-of-hand tax heist which must be the first time in Australia's taxation history that tax is levied on unrealised profits.

zxsder
March 03, 2023

Spot on Peter, screwing over the younger generation again!

Graham Hand
March 03, 2023

FYI, a couple of directors of large super funds have told me they are happy their funds are not given the expense and risk of calculating and processing these extra tax payments. Would have been an administrative burden and cost to the detriment of the vast majority of members. Leave it to the ATO.

SMSF Trustee
March 03, 2023

And as I said in another comment, as an SMSF Trustee I'm also glad not to have to deal with this within the fund.

SN
March 03, 2023

Hi Graham
I quote from your example in article :
"Warren is 52 with $4 million in superannuation at 30 June 2025. He makes no contributions or withdrawals. By 30 June 2026 his balance has grown to $4.5 million."

My question is , Will Warren be able to withdraw in excess of $ 3 million from his Accumulation Account ??.Warren is 52 years and is not allowed to withdraw with present rules.

Mark
March 03, 2023

You answered your own question. Under present rules, he can not.


They are taken submissions and I have written in and asked for an amendment to the rules of early release.

Basically saying that if you attain a balance of $3M prior to preservation age you can if you choose take the extra out.

This would mean it would likely be taxed like other early release options at 20% and 2% Medicare but it would still be nice to have at least the option.

Simon
March 03, 2023

Good question. If I am in my 50's, for example, and recently decided to make some additional non-concessional contributions to Super, I will be rueing the day I made that decision in light of the new rules...

Mark
March 02, 2023

Hopefully common sense will prevail and indexing of the $3M comes in to play and tax is on realised gains.

SMSF Trustee
March 03, 2023

The Treasurer says he has intentionally not allowed for indexing in the same way as personal income tax scales aren't automatically adjusted. It can be changed as part of future Budget processes the same as all tax thresholds are open to adjustment when the government deems that appropriate.
That's actually not an unreasonable approach.

Anne
March 03, 2023

The Transfer Balance Cap is indexed. Why wouldn't the Cap of $3M be similarly indexed? Should we really have two different rules for the two caps?????

Geoff R
March 04, 2023

"The Transfer Balance Cap is indexed. Why wouldn't the Cap of $3M be similarly indexed? Should we really have two different rules for the two caps?????" Yes I think a limit of twice the TBC would have been fairer. It would currently be $3.4m moving soon to $3.8m. If they really never index this $3m amount then many younger people will be caught in future years. In fact before too long the TBC will be greater than the $3m cap!

Nick
March 03, 2023

I think the government's intention is to discourage funds in excess of the zero tax amount (currently $1.7m) and it's for this reason the $3m cap won't be indexed. Eventually, the zero tax amount will reach $3m at which time anything in excess of $3m will be taxed nominally at 30%. Only thereafter, by default, the $3m cap be indexed to match the zero tax pension amount.

Steve
March 03, 2023

No , for a total balance of say $3.5million the amount above $3million will be taxed as $500,000/$3,500,000 X 15% X annual increase in Fund Balance. This will be taxed to the individual and the effective tax rate would be quite low in most instances. The Fund will continue to have no tax to pay on the pension account. If the tax free pension amount was allowed to be increased to $3million and the cap wasn't increased then the maximum tax rate that could be charged is 15%,as the 30% rate they are referring to is inclusive of the 15% on the accumulation account earnings. The simplest way to keep a lid on tax free super balances is to increase the minimum pension and force people to accumulate surplus funds outside of super. That's super easy. It happens over time and enables surplus assets in Super to easily be sold or simply be transferred to the Fund Member, so there is no great disruption to the overall plan. The idiots in Treasury have never heard of KISS. Everything they come up with is super complicated and this is just another one of their hair brained schemes. The exemption on super pensions should also be removed but not so it is subjected to tax but to just expose any earnings outside of super to tax instead of being shielded by an effective tax free threshold of approx $28,500. At the moment a retiree couple earning 4% interest per annum on $1,425,000 outside of super would pay no tax. If they both earnt $20,000 of fully franked dividends outside of super, not only would they pay no tax they would receive annual tax refunds of $8,500 each. To earn $40,000 of dividends you would need approx $800,000 invested. The combination of the tax free super pension and an effective tax free threshold of $28,500 is nuts, but those in Canberra can't see this.

Jason
March 02, 2023

Industry superfunds have unit prices that reflect net of tax value. If large super balance is left in an industry superfund, does the superfund need to pay tax on your behalf and calculate the tax into unit prices?

SMSF Trustee
March 03, 2023

No Jason. Read the Fact Sheet. This will be done by the ATO dealing directly with the tax payer.
That means that your industry fund or other super fund takes on no administration burden from this. All they might have to do is to process a tax payment for you if you choose to pay it out of the fund, but they are set up to do that already.
Of course this also means that SMSF Trustees are not given another administrative task either.
I like that aspect of this.

Geoff R
March 03, 2023

"Of course this also means that SMSF Trustees are not given another administrative task either.
I like that aspect of this."

yes me too - it could have been a lot worse in that regard.

Stephen Maloy
March 02, 2023

Beyond concerns about broken promises, non-indexation and modifying the super system in to system that is no longer fit for purpose (at our current 7% inflation rate, $3 million will be worth $775K in 20 years when a 45 year old person today might hope to retire), the effort to introduce more complexity into the system mystifies me. Why not just tax super income in the accumulation phase at a higher rate above a certain income level? No need to go off on new wealth taxes.

Graham Hand
March 02, 2023

Hi Stephen, on your comment "Why not just tax super income in the accumulation phase at a higher rate above a certain income level?", Treasury has given an explanation for this as outlined in the article. But your suggestion is exactly how I thought it would work, and in fact, the way I originally wrote the article, like this:

How will the new limit work?

Let’s consider an example of Joe with a large superannuation balance of $5 million in a single member Self-Managed Super Fund (SMSF). Joe started a pension when the Transfer Balance Cap (the amount which could be transferred from accumulation to pension within superannuation) was $1.6 million (it was increased to $1.7 million on 1 July 2022 and will rise to $1.9 million on 1 July 2024 due to inflation indexation). Let’s also assume that Joe’s SMSF generates annual taxable income at 5% to give $250,000.

Under the current tax arrangements, continuing for 2022/23, 2023/24 and 2024/25, the tax calculation is approximately as follows (remembering that earnings on pensions are taxed at 0% and the balance in accumulation is currently taxed at 15%):

$1.6 million/$5 million X 0% X $250,000 = $0 (the share of pension in the total)
$3.4 million/$5 million X 15% X $250,000 = $25,500 (the share of accumulation)

Currently, Joe’s SMSF pays tax of $25,500, which is a tax rate of 10.2%.

That is, the SMSF has two tax tiers, 0% and 15%, and earnings are taxed according to the share of pension and accumulation funds within the total fund balance. In practice, the $1.6 million in Joe’s pension account has probably increased but we have ignored this for the simple illustration purposes. The SMSF requires an actuarial certificate to sign off on the calculations each year, especially to verify asset values.

What will happen in the same circumstances, keeping all variables except the tax rate unchanged, in 2025/26? Then we will have three tiers:

$1.6 million/$5 million X 0% X $250,000 = $0 (pension)
$1.4 million/$5 million X 15% X $250,000 = $10,500 (accumulation tier 1)
$2 million/$5 million X 30% X $250,000 = $30,000 (accumulation tier 2)

Joe’s SMSF will pay tax of $40,500, which is a tax rate of 16.2% on $250,000. That’s an extra $15,000 in tax and a rise in the average tax rate from 10.2% to 16.2%. As a check on the calculation and a simpler route to the answer, it’s 40% (2/5) of $250,000 facing a tax increase of 15%, or $15,000.

Robert Bertolini
March 04, 2023

Thanks for the terrific article:
Am I correct in my understanding that because of the way the new tax is calculated people are effectively going to be pay tax on earnings on a pension account that would otherwise not be taxed. In the future it is going to be possible that the original $1.7m grows to over $3m and is subject to the new regime. If I am correct then this measure goes way past addressing the original mischief as in the case of a pension account there have not been excessive contributions its purely the growth in earnings that have generated the "excessive" balance.

Other wrinkles include:
1. what happens to a carried forward loss when the superfund is closed down
2. No cgt discount on the unrealised gain ?
3. The value of the loss has a different value in later years. In the loss year the proportion of the fund that is over $3m is going to be lower than the year when the loss is recouped.

Unfortunately this sort of "reform" is what we are left with when we as a society are not prepared to have a mature discussion about the real changes that are needed!









Luke
March 05, 2023

Graham, can members withdraw excess super balances from the superfund by transferring asx listed shares out as ‘in specie’ or do they have to cash shares and withdraw cash?

Dudley
March 02, 2023

"Why not just tax super income in the accumulation phase at a higher rate above a certain income level? No need to go off on new wealth taxes.": Abolish super. Age Pension for all age eligible. Adjust tax rates. Job done. Simples.

Mark
March 03, 2023

Superannuation system is now too big to abolish. Inflationary results from up to $3.4T suddenly coming in to the economy is a scary thought, way too much money chasing too few goods.

Dudley
March 03, 2023

"Inflationary results":

Surely not having financial wealth "trussed up for donkey's ages" would result in more savings invested resulting in more financial asset inflation; not spent resulting in more goods & services inflation. No?

Mark
March 03, 2023

No. There are about 400000 Super accounts with 7 figure or more balances, I'd put it to you that these people are probably a bit more savvy than the millions of account holders less so.

So yes, some would continue to be savvy, the rest, well you only have to read comments on media articles that are full of, it's our money we should be able to do with at we please, Super is a scam, Super is theft, I should be able to buy a house with my Super etc.

The very reason we have Super is because the majority of people can't save it won't save for their future. Why put money in Super, you could die tomorrow, live for today etc.

Don't bother saving for retirement, spend your money and get a pension, because free money

Dudley
March 03, 2023

"Don't bother saving for retirement, spend your money and get a pension, because free money":

Seems very rational thing to do if:
. will never have more than Age Pension Asset Test Taper Threshold capital.
. will never have tapered Age Pension + Investment Returns > full Age Pension.

No plausible reason to save so run up debt preferably for home purchase, at condition of release & >= age 67, draw out all super, extinguish debts, invest remaining capital personally, claim full Age Pension.

Most will be better off with home and full Age Pension; Age Pension Asset Test Taper Threshold capital being better.

So why compel those people to act against their best interest - and against Commonwealth best interest in providing Super 'Concessions'?

David
March 03, 2023

Commenting on Mark's second comment - yes, it's rather chilling when you read the commentary on articles in what we'll call the "main stream media" - Fairfax/Guardian etc - when you realise how many people out there regard all wealth as theirs, to be redistributed by the Government into various programs, and anyone earning a significant amount as a cash cow to be tapped.

So much for studying for years and years and years to become a professional and master something and reap the associated financial rewards. The Clever Country, not. They're coming for you...

I've had to stop reading them - too frustrating.

Dudley
March 03, 2023

Treasury forecast super balances at retirement: https://research.treasury.gov.au/sites/research.treasury.gov.au/files/2019-11/Superannuation%20balances%20at%20retirement.pdf 2060 around 30% likely to have super balances < $250,000, presumably eligible for full Age Pension. At the Age Pension Asset Test Taper cutoff capital, the retiree's income is entirely dependant on investment returns. 0% returns, $0 income. There is a strong incentive for them to rearrange their finances to receive the full Age Pension. If the Means Tests are not abolished, most retirees will fall in the Means Tests trap where their capital has net negative returns. Their alternatives are to avoid the trap by: . not saving, . spending capital on consumption, . investing in home improvement - where capital gains are tax free, thereby eroding financial capital to receive a full Age Pension earning a government guaranteed 7.8% indexed for life tax free on capital reassigned.

Jack
March 02, 2023

The other issue is, that all withdrawals, including pensions, from your fund during the financial year are counted back in for the purposes of this tax. If your started the year with $4m and decided to meet the new criteria, by withdrawing $1m, you finish under the threshold but you are still taxed on the money withdrawn, because it’s added back into the taxable amount.

Geoff R
March 02, 2023

I think providing you end the year under $3million you should not need to worry about the extra tax.

"Individuals with total superannuation balances (TSBs) over $3 million at the end of a financial
year will be subject to a tax of 15 per cent on earnings."

however if you end up with $3,000,001 then sure the withdrawals are added back in - but it would not matter as the proportion of earnings over $3m would be negligible (1 / 3,000,001)

HardeyVasse
March 02, 2023

If I was in the situation where I had to pay 30% tax on the amount of super above $3m, I would take the excess out and use it to set up set up a small family investment company. The company tax rate on this would be 25% and I would only pay income tax on the amount I took out each year as a dividend, with the remainder staying in the company as retained earnings.

I would have flexibility in initially assigning shares to a spouse or other family members, so franked dividends could be paid to low income family members.

I could eventually leave the company to my heirs, with no tax to pay (currently the untaxed proportion of your super is taxed at 15% when your heirs receive it).

I am not an accountant and would be interested to know if this strategy is valid.

Dudley
March 02, 2023

Valid.

When SAPTO, pay gross dividends <= $29,783 (2022-23). Marginal tax: 0%; +$1: 31.5%.

Dudley
March 02, 2023

"flexibility in initially assigning shares":

Can also later transfer or issue shares of whatever class is allowed by company constitution.

Jack
March 02, 2023

If the assets are owned by the company, they can not be assigned to particular shareholders because all shareholders must be treated the same, but some shareholders can hold more shares than others. You can get round this by having differ classes of shares. The important point about a company, is that it pays tax on all its profits (@30%) but not all after-tax profits need to be distributed. The taxes paid become franking credits that might be useful later when the shareholders have a lower personal tax rate.

Franco
March 02, 2023

If I was in the situation where I had to pay 30% tax on the amount of super above $3m, i would think how lucky am i to have $3m! Let the criticism begin

Franco
March 02, 2023

A "dignified retirement"---can anyone please explain ?

John
March 03, 2023

I have read recently that Albanese will get $400,000 indexed for life.

Maybe that figure should be used as the benchmark for a dignified retirement.

After all what is good for the goose ...

Franco
March 03, 2023

So thats your definition, any other suggestions from the readers?

James
March 03, 2023

"I have read recently that Albanese will get $400,000 indexed for life. Maybe that figure should be used as the benchmark for a dignified retirement."

Sounds good! All good leaders lead by example. What's good for the PM, other politicians and public servants should apply to all of us in this egalitarian society we live in! As if!

Franco
March 03, 2023

John and James ,great argument , ok , dignified if someone gets more than you ?

James
March 03, 2023

@Franco

"John and James ,great argument , ok , dignified if someone gets more than you ?"

Franco, that's life! There are nicer, better houses than mine in my street. People earn more and drive nicer cars. So what? Each to their own. Good luck to them. I'm sure they've paid a lot of tax too.

Should those that have little superannuation and have not bothered to save at all benefit as much as someone that has foregone present consumption and deliberately saved for their future?

True happiness is genuinely envying no-one!

Franco
March 03, 2023

WE are also talking about couples that can have $3m each in super and pay very little tax.

Did they really "forego present consumption and deliberately saved for their future" ??

John
March 03, 2023

Franco

I am sure a $400000 pension indexed for life would cost far more than $3M if purchased in the real world and not funded by taxpayers.

Will Albanese be impacted by his new change? My guess is NO. He wants other people to support him.

what is good for the goose ...

Geoff R
March 03, 2023

Franco said:

"WE are also talking about couples that can have $3m each in super and pay very little tax.
Did they really "forego present consumption and deliberately saved for their future" ??"

well yes! Obviously they did not get large Super balances by not saving extra. They could have done what the majority do and spend every penny they receive - but instead they lived a less lavish life and saved for their retirement. They won't get a government pension and should be thanked for supporting themselves rather than putting their hand out for welfare.

there was a guy the other week in the comments of another article here that had $7m in Super but had lived in a caravan for 8 years! That is serious dedication to saving - and more than I would be prepared to do. I just hope he can enjoy his savings now without getting penalized too much with extra taxes. When the PM mentioned the other day that the average Super balance was around $150k I thought "wow the majority of people have not saved a cent themselves and what little balance they have is just from the compulsory Super guarantee." And then these non-savers (who get rewarded with the government pension) are jealous of those who have made the effort.

Paul
March 03, 2023

If Albanese is entitled to a lifetime indexed pension of $400k (no idea if this is true) I understand for super purposes this pension is valued at $6.4 million (16x $400k). How this would be treated under the proposed regime I don’t know.

Franco
March 03, 2023

I still can not see how an average worker on even an above average income can accumulate $3m by simply sacrificing extra throughout their working life. Stop comparing to the Prime Ministers entitlement. Complaining wealthy Australians , you wont live forever, so drawdown on your wealth if needed and lets have a fairer Australia for the 99%. And by the way, i am in the 1%

John
March 04, 2023

$23000pa (after tax deducted from contributions) for 35 years at 7% (after tax and fees) should get you to $3M

Through in some non concessional contributions and its easy, just takes time (and consistent super rules)

How did you do it Franco?

Martin
March 04, 2023

Defining a person as rich or lucky based on their super balance alone is absurd. I have close to $3m in my SMSF, but don’t own a home. How does that make me richer than someone with a $2million home and $1m in super? This just highlights once again for well thought through tax refor, not ad hoc money grabs.

Franco
March 05, 2023

John, lets not extrapolate 35yrs into the future and assume that it will still be a $3m cap.
Also $23000 a year for 35yrs @ 7%---yeah thats not realistic for 90% of workers and families.
Still sounding like a whinge from wealthy older australians.

john
March 07, 2023

Franco
You could not see how it could be done. Yet you clam to have achieved that level.

I gave a example of how. Not a whinge at all.

BTW 35 years is not even a full working life. So it should be achievable with less contributions, starting from a early age and the benefits of compounding.

And your comments sounds like someone who just wants the last word. So I will leave you to it.


dave
March 03, 2023

Seems valid. Although, the "investment company" tax rate may well be 30%, not 25% if > 80% of the income is from passive income (i.e. from investments). In the investment company, you may require different share classes to stream dividends tax effectively. Arguably you would transfer the "high growth" "low income" investments from super to the investment company, this has the double benefit of not generating a lot of taxable income, and potentially decreasing the increase in super >$3m that would be taxed. Although, this strategy may eventually catch up to you - with compounding in the investment company and higher and higher super withdrawals as you age (withdraw > personal expenses = surplus cash to invest), you may have quite a bit in the the investment company and a potential tax problem - although unlike super > $3m, the unrealised gains wouldn't be taxed, and with the franking credit offset in the investment company, tax payable would be less than super until dividends are paid - maybe not even then. On death, the investment company shares could be transferred to the beneficiary at their "cost base" and only taxable when sold. To avoid the 15% super tax on death by leaving it to non dependants - If you knew you were close to "cashing in your chips" and >= 60, you could take the it out of super as a lump sum - no tax. So bottom line, those at or near the $3m limit, can adjust their affairs to avoid the additional 15% tax, and the savings estimate by labor is probably overstated.

Geoff R
March 03, 2023

you are correct about 30% tax rates.

one thing to bear in mind is that there is no CGT discount in the company when assets are sold.

also you can get the situation of excess franking credits which represent tax paid that you cannot (easily) get a credit for.

Dudley
March 03, 2023

Make an investment that is not 'Base rate entity passive income':
https://www.ato.gov.au/rates/changes-to-company-tax-rates/

Barry
March 05, 2023

Your company can pay 25% if it "trades" shares instead of "invests" in shares.

It's a gray area. You could be either an investor or a trader when doing pretty much the same kinds of investments.

If you want the 25% tax rate then you can have the 25% tax rate just by buying & selling a few shares.

Sarah
March 04, 2023

Company tax rate for investment companies (generating passive income) is currently still 30% and companies not eligible for CGT discount.
A trust as the investment vehicle would provide greater flexibility and access to CGT discounting on realised gains, you'd then want an appropriate corporate beneficiary structure to cap tax on excess earnings at 30% for when where you can't access low rate beneficiaries.

Kelly Buchanan
March 02, 2023

Here are a few examples of the dastardly consequences this change will create.

1. Let’s say you own a rental unit in your SMSF. It goes up in value by $100k in a year. Labour will include that in the calculation of ‘earnings’ and you’ll pay tax on it even though you have not received any money with which to pay the tax.

2. Let’s say you own $10k of CBA shares. During the year they rise in value to $11k. Labour will include that in the calculation of ‘earnings’ and you’ll pay tax on it even though you have not received any money with which to pay the tax.

3. In example 1 above, let’s say you then sell the rental unit. The $100k increase in value is then taxed at capital gains tax rates, so you’ve paid tax on the gain as ‘earnings’ and as capital gains. You’re taxed twice.

4. In example 2 above, let’s say you then sell the CBA shares. The $1k increase in value is taxed as capital gains, so you’ve paid tax on the gain as ‘earnings’ and as capital gains. You’re taxed twice.

5. Labour will include the pension you receive from super in its calculation of ‘earnings’. So your pension is being taxed.

6. The continuous taxation of gains in the value of your superfund as ‘earnings’ will stifle the compounding of growth that is inherent and necessary for a successful long-term savings strategy. It will further impede the savings so desperately needed by workers at all stages of their lives.

Geoff R
March 02, 2023

"1. Let’s say you own a rental unit in your SMSF. It goes up in value by $100k in a year. Labour will include that in the calculation of ‘earnings’ and you’ll pay tax on it even though you have not received any money with which to pay the tax."

yes this is indeed a problem with taxing notional or unrealized gains - also the value could subsequently fall again. You may be forced to sell assets just to pay the tax.

"3. In example 1 above, let’s say you then sell the rental unit. The $100k increase in value is then taxed at capital gains tax rates, so you’ve paid tax on the gain as ‘earnings’ and as capital gains. You’re taxed twice."

yes you are taxed twice but this is the whole idea! You would pay the normal 10% CGT (assuming in accumulation mode) when you sell but you would also have paid the extra "bonus" 15% tax when the value first increased (perhaps years earlier). The 15% extra tax is just that - extra tax.

Kelly Buchanan
March 03, 2023

Geoff R -- as I read it this happens regardless of how big your balance is. I'd love to be wrong on this as I'm not a fan of double taxation.

Geoff R
March 03, 2023

Hi Kelly - you are probably not alone in not liking double taxation!

My reading is that the extra 15% tax on TSB increases (which they term "earnings") ONLY applies where your TSB at the end of the financial year is above $3million. And it only applies to the proportion above $3million (as per the worked examples). So if you have $4m then it will apply to 25% of the increase. If you have $6m it would be 50%, $9m would be 66.67% and so on.

Think of that "poor soul" with $400m - their percentage is over 99%. Who'd want to be in that dire position?

Manoj Abichandani
March 02, 2023

I took all my wife’s contribution (under spouse splitting) because I was going to be 60 first and retire first - Then Morrison said not all the money can go on pension- only $1.6 M can go on pension

Now I have $6M in TSB and my wife has nothing. The only option I have is to Divorce my wife and give her half my super (I love her dearly and will marry her again - if super rules allow it)

Also many pensions can start with the new $1.9M and go up to $3 M as earnings and pensions are not counted towards Transfer Balance Cap. So one can have 0% tax and the next $1 will pay $30% tax which will encourage withdrawals and spending > inflation.

I think if tax rate is increased from 15% to 15.15% a 10% increase - treasury will get the annual $2B they are short by.

Only a super actuary can work out - each year - how my 2 TSB will be taxed as my two SMSF lodge at different times and both have pension assets

Lastly SIS Regulation 8.02b tells us that all assets will be to market at 30th June - I see a war building between SMSF administrators and SMSF Auditors on property valuations each year. We live in a world where no two Valuer’s can agree to one price. And border line cases will dispute realisable value to after CGT cash value to stay under $3M

Jim C - I have been an SMSF administrator and currently an auditor overall for 30 years - please wait for my feedback - your idea is unworkable with all the other laws in place - let’s have a conversation with me and others and find a better way.

Or else most of us 80,000 with withdraw and buy houses or give yo the kids in the same fund and you will have only those with $20 M and over 10,000 people who will take the money overseas

For starters think of taxing income of accumulation accounts at a higher marginal tax rate - unrealised gain increases asset value but is not taxable income of the member. Secondly, Please leave pensioners alone if you want to live in Canberra after 2025.

Graeme Cant
March 02, 2023

Mmmm. A 10% increase in a 15% tax rate is to 16.5%, not 15.15%.

Manoj Abichandani
March 03, 2023

Sorry, I meant a 1% increase
As $240B of contributions and income is taxed - @15% an increase in 1% of the tax rate 15.15% will bring in $2.4B extra in tax

Denial
March 03, 2023

That would definitely be a good test for your marriage.

ALP showing the relative financial incompetencies again with this messy proposal. Just tax the realized income rather than the asset. Doh

Barry
March 05, 2023

Yes, divorce is one of the few valid ways to reduce/eliminate this tax.

Luke
March 07, 2023

yeah I was thinking the same thing, only way people will be able to avoid paying this tax is by divorce, the hardest part about avoiding fraud is staying apart form each other for 1 whole year before reuniting, easier to just have your first cousin "live" at your place for 6 months and give half your super to them if you trust them that is, you don't even need to marry them or be in a relationship, they'll just be entitled to half your super.

Richard
March 02, 2023

So an SMSF with say a property (or other asset not marked to market) will have to put a value on it every year. In the past this increase was not taxed (unless sold). Now it will be. This will be interesting! I bet there will be a few trustees that will swear that their "asset" has hardly increased in value. Valuers must be rubbing their hands in anticipation of all the additional work.

Geoff R
March 02, 2023

"So an SMSF with say a property (or other asset not marked to market) will have to put a value on it every year."

you already have to do that. The difference is that in the past any increases were not taxed until something was sold.

Stephen
March 02, 2023

Annual valuations of unlisted assets such as property are about to get a lot more significant for those with TSB over $3m.

Geoff R
March 02, 2023

ah yes my Super fund's investment property just halved in value!

(Dear Mr Taxman, that was merely a joke, a simple jest)

Peter Goerman
March 02, 2023

The sting in the tail is the tax on unrealised capital gains, calculated by subtracting the start-of-year Total Superannuation Balance (TSB) from the end-of-year Total Superannuation Balance (TSB), which is ON TOP of the tax on all other earnings. Is this the first time in Australian tax history that unrealised capital gains are taxed? It was never mentioned by the Treasurer!!! What an underhanded approach to milking the taxpayer!

John
March 02, 2023

Can someone do a calculation for me. At the beginning of the year there is $2.9m in super, at year end there is $3.2m. No contributions, just growth. What is the tax liability?

Geoff R
March 02, 2023

"At the beginning of the year there is $2.9m in super, at year end there is $3.2m. No contributions, just growth. What is the tax liability?"

By my reckoning the EXTRA tax payable is $2,812.50

0.15 * 300,000 * 200,000 / 3,200,000 = $2,812.50

maybe someone can check that

if you are lucky they might round to the whole dollar and let you off the fifty cents.

Andrew
March 02, 2023

The concept of using the "total super balance" makes it complex. The balance fluctuates and you have to pick a point in time. Outside super you are not taxed on the 'balance' of a bank deposit, you are taxed on the earnings. So why not the same for super accumulation funds - i.e. apply the 15% to earnings below an earnings threshold, and 30% above the earnings threshold. Income fund earnings would stay untaxed - as now. Would seem to be much simpler to implement and get around fluctuating balances and the unrealized whole capital gain issues. Or maybe I'm missing something.

SMSF Trustee
March 02, 2023

They are using points in time. Your balance at the start of the tax year determines if you have more than $3mn. If you do then the balance at the end of the year determines the amount of tax to be calculated. I've made a couple of other comments on this elsewhere in this thread.

But an additional question/observation comes to mind. If you pay the tax out of your fund then I assume that's regarded as a withdrawal in the subsequent year, thus reducing the "earnings" for that second year. If you pay the tax from outside super (like many Div 293 people do) then you won't get that earnings reduction so you'll compound your tax payments going forward.

Geoff R
March 02, 2023

"Your balance at the start of the tax year determines if you have more than $3mn"

please note that it is your balance at the END of the tax year that determines if you have $3 million (not start of year)

the Treasury explainer says:

"Individuals with total superannuation balances (TSBs) over $3 million at the end of a financial
year will be subject to a tax of 15 per cent on earnings"

note that "earnings" in this case includes unrealized capital gains - it is the movement of your Super balance (after allowing for contributions and withdrawals).

SMSF Trustee
March 02, 2023

Yes Geoff R that's right. My point about it being at a point in time is right but you're correct that I got the point in time wrong! Teaches me to have the document open in front of me when writing.

Stephen K
March 02, 2023

The outrage over this very modest measure is entirely confected. If the purpose of superannuation is to provide retirement income, rather than tax shielded inheritances, it follows that the maximum balance in super subject to concessional tax should not exceed the maximum allowable pension balance (a concept that was introduced by a LNP government). Over time, with the non-indexation of the $3 million threshold this will come about by mid-way through the next decade.

The problem with the Government's proposal, which people will have plenty of time to reflect on, is that it is not ambitious enough. We need a thorough review of taxation, retirement incomes and social security, not ad hoc changes. Let's hope that Dr Chalmers opens up that "conversation" in the May Budget as the nation urgently needs it. Claims on tax dollars are rising steeply and Federal Government debt is high for a peacetime economy. Our current tax settings cannot continue. We are about to be mugged by reality.

Greg
March 02, 2023

Except that the maximum allowable pension balance of politicians and public servants is $5 million+

Stephen K
March 03, 2023

Don't worry they won't be forgotten. There is nothing to stop this or future governments from increasing tax or limiting rebates on defined benefit pensions, which is a possibly their only option to reduce the costs and benefits of those pensions. I'd say given the need to fix the Budget such changes are inevitable.

Liz
March 03, 2023

Why should anyone bother to save and invest just to be allowed to generate the equivalent of the pension? You can spend everything you earn all your life and then claim government support at age 67. There has to be some carrot to encourage people to lock away their own money for decades

Stephen K
March 03, 2023

Liz, the maximum allowable pension balance is expected to be 1.9 million from 1 July. I think you might have misinterpreted this reference to mean the maximum Age Pension, a very different thing. On 1.9 million you will generate much more income than the maximum Age Pension.

Dick
March 02, 2023

The net effect remains that Senior Public Servants in Canberra will have the largest, riskless, Government Guaranteed pensions , as has been Treasury's aim for twenty years. The addition of tax on unrealised gains is also a long term Treasury aspiration, which may be extended to individuals and corporates in due course. It is a very destructive method of Tax, essentially a wealth Tax, an aspiration tax, a tax on hard work/success. 

John
March 02, 2023

There's an error in Treasury's last example - poor Dave will be terribly confused. But what should we expect?

Geoff R
March 02, 2023

"There's an error in Treasury's last example - poor Dave will be terribly confused. But what should we expect?"

John are you referring to the fact that his tax liability for 2026-27 should be $52,500 not $52,000 ??

or something else?

John
March 03, 2023

Thanks Geoff R. Let's start with the third dash point in the example for 'Dave':
'His proportion of earnings corresponding to funds above $3 million is:
($6 million - $3 million) ÷ $3 million = 50%'
Now, while we are in the process of re-learning the definitions of such terms as 'modest' and 'intention', one thing I can be confident about is that the laws of mathematics remain immutable. No matter how many times you do the calculation in dash point #3, the answer is always the same - that is, 100% (not 50%). Treasury has simply not applied its own formula in this example (although, of course, the earnings loss of $300,000 attributable to the excess balance is correct).
While you are correct in noting that 15% of $350,000 is $52,500, not $52,000 as calculated in the Treasury example, I am not about to do Treasury's work for them and work out what Dave's tax liability is in 2026-27. Besides, there is simply not enough information in the example to do this. The example notes that '(a)t 30 June 2027, Dave’s funds make earnings on his excess superannuation balance of $650,000' but we are not told what his closing balance is at 30 June 2027. Therefore, we are not able to calculate the 'proportion of earnings corresponding to funds above $3 million' needed to apply Treasury's formula.

Geoff R
March 03, 2023

Thanks John for answering.

'His proportion of earnings corresponding to funds above $3 million is:
($6 million - $3 million) ÷ $3 million = 50%'

the 50% is correct but they have done it wrong. It should be

($6 million - $3 million) ÷ $6 million = 50%

Basically that is saying that if you have $6m then half of that is over the $3m limit.

So Treasury have at two mistakes with the one example. Someone should have checked the figures!

The next bit is all in the wording. They say "Dave’s funds make earnings on his excess superannuation balance of $650,000". What this says is they have done the calculation and come up with $650k - the total increase is much more than that but that is the proportion that is pro-rata based on the excess super balance.

So they are just leaving out a few steps to try to keep it simple. Having worked out the $650k they then deduct the earlier carried forward loss which is what they are trying to demonstrate.

Stephen
March 02, 2023

I love the way folks with a vested interest make this sound complicated, it isn't. I love the way those with a vested interest bemoan he Governments plans. I have more than $3 mio in Super and I do not care that I will be paying an extra $20k plus a year in tax. Why should those of us with $3 mio or more in super be subsidised by Australian tax payers who will never be close to that amount. This move is a storm in a teacup and will only deliver the Government more votes with the LNP as usual failing to read the room.

David
March 02, 2023

Actually, it is complicated. If we all had just an industry fund then maybe it's not complicated, but that's not how super is.

And if you think the consternation is JUST about this particular change, then perhaps it's you who isn't "reading the room" - as this raises the question of "Well, what next?"

This particular change as it won't affect me but I am concerned with the direction that this change and all the other rhetoric that the government has been involved in in the super space lately is heading.

I'm also concerned at the industry super funds rushing out to support it - if you're in an industry super fund, you might want to consider whether actively supporting more tax on their members is acting in your best financial interests. Yes, I know there won't be many industry fund accounts affected, it's the principle that's at stake.

Unfortunately both sides of politics fail to grasp the complexity of the super mess they've created over the decades and every utterance from either side just adds to it.

Stephen
March 03, 2023

For anyone who has over $3 mio it is very simple, the math is very simple the complexity comes from those who lack understanding of the Super system. What is next? I guess for every change in anything there is always something next but that scare tactic will not work in this case as it touches hardly anyone. I would love to know how many of the 80,000 are in Industry Super Funds, not very many I would suggest. I agree with your last para but this move is a non event. It is of more concern to the industry interests than the affected superannuants.

grump
March 05, 2023

"I would love to know how many of the 80,000 are in Industry Super Funds, not many I would suggest".
Exactly, most will be the Dick Smiths of business, and surgeons who have put their room suites into their Super fund. Precisely the sort of people who could pay more tax, no?

mick
March 05, 2023

show me your super balance stephen

Michael
March 02, 2023

Interested to know if the proposed "objective of super" will allow group insurance to be held in super? Presumably YES as it is an ancillary purpose at the moment and a big part of super funds. If so, then maybe lump sum withdrawals will also be ancillary? Just a thought ...

Nick
March 02, 2023

From how I see it, given TSB will be an after tax figure. Tax for someone with > $3.0m in accumulation phase will be paying 45% tax. Given they are also taxing unrealised gains and no indexation of the $3.0m figure, there will be a lot of better options than investing in super.

SMSF Trustee
March 02, 2023

No, Nick it's a marginal tax rate of 15% on top.of the existing 15% - though the definition of "earnings" is different. So it's not 45% at all. OK let's do an example. Someone who is retired has a total of $4mn. In a tax year the fund gets 5% in old fashioned income (interest, dividends and realised gains from selling shares at a profit, less fees). It also grows by 5% due to a rising share market. In dollar terms the income is $200,000 and the unrealised gain is also $200,000. Let's work out the tax. For this calculation I'm leaving out franking credits. They will reduce the tax paid further of course. They have $1.9 in pension phase which is 47.5% of the total. So take away $95,000 from the income for tax purposes. Leaves $105,000 attributed to accumulation account. That's taxed at 15% in the fund i.e. $15,750. In the old regime that's all that's paid resulting in an overall tax rate on the $200k earnings of 7.8%. In the new regime the excess balance tax is based on $4.4 mn (the 10% total return). 0.4 divided by 3 is 13% of the earnings. 13% x $400k is $52k which is taxed at 15%. So another $7,800 is paid. Total tax is thus $23,550. On the total (true) income earnings in the fund that's 11.8%. OK let's take franking into account. Assume the fund earnings were 50% from fully franked Australian shares. That is $100k will have paid 30% tax by the company - obviously $30k. Our taxpayer's tax rate on those should have been 7.8% (calculated above) so there will be a tax crrdit of $22,200 paid into the fund. Offsetting the $15,750 due from "raw" earnings if I can put it that way, the ATO will refund $6,450 into the Fund. (There'll be no franking credit refund due on the "above $3mn earnings" because it's a net change in fund size calculation not an itemised source of earnings calculation. That's how I interpret it anyway.) So they'll still have the new tax to pay of $7,800. If they pay it out of the fund that then results in a net payment to the ATO of $1,250. Clearly this is only one example with loads of specific assumptions in it. It shows that tax payable increases from a refund of $6,450 to a net payment of $1,250. ie the amount of the new tax. I still don't like in principle the way this new tax is being calculated, but really it's not all that onerous! No one ever likes paying more tax but, hey, governments have every right to increase tax rates. This could easily have been a lot worse.

Hans
March 02, 2023

Having looked at the ATO Fact Sheet, it would appear that those in pension phase will lose the tax free status of their earnings. TSB (Total Superannuation Balance) includes both the accumulation and pension phase. The general reporting in the media predominantly mentions the transition from a tax rate on earnings of 15% to 30% and uses the word superannuation to refer only to the accumulation phase. Reports I’ve seen, rarely mention the pension phase and when they do (including comments on your article) they assume no tax on earnings when funds are in the pension phase. The ATO Fact sheet seems to suggest otherwise.

SMSF Trustee
March 02, 2023

Don't think that's right.

You have $4 mn in total, with $1.9 in pension. You will pay zero tax within your fund on the earnings on that. You will pay 15% within the fund on the $2.1 in accumulation. And you will pay 15% either from in the fund or outside it on the earnings attributed to the $1 mn you have that's over $3mn. (Subject to the two poorly designed technical aspects of that calculation I've commented on elsewhere in this stream.)

Chris
March 02, 2023

I am surprised to learn that not only income in the fund will be taxed but also capital gains. This is a huge change taxing unrealised growth within the fund. Albanese and Chalmers were sneaky in not providing the detail at the announcement. So I will be paying tax on the income and paying a tax on the movement of the balance. Whilst I can accept the 30% on income for balances above $3m ( which must be indexed ) I strongly disagree with the CGT on the balance.

SMSF Trustee
March 02, 2023

Taxing unrealised gains is the bit of this that has me angry. There isn't any cash flow to go with increased asset valuations but investors will have to find the cash to pay the tax from either outside super or inside it. For many of us affected by this that will effectively make the changes operate the same as a cap because it will be better to own growth assets that take you over $3mn outside super where mark to market growth isn't taxed.

Graham Hand
March 02, 2023

Yes, the more you think about the tax hit in a growth portfolio, the worst taxing unrealised capital gains becomes. Imagine an SMSF with a heavy equities allocation, needing to find the cash to pay a large tax bill on top of cash for pension payments.

SMSF Trustee
March 02, 2023

And a other devil in the detail. The way your amount over $3mn is calculated is based on the year-end value! So you start a tax year with $4mn (an amount used in a Treasury example). You'd think that this meant you had 25% of your fund earnings to be subject to the 15% tax. In which case, if you "earn" $500k (as in Treasury example) you'd think that you'd pay tax on $125k (=25% of $500k). But no, the proportion is calculated after the earnings are added! So it's (4.5-3)/4 or 33%. So you actually pay tax on $165k.

I've got no real objection to a higher tax rate on balances above $3mn. Personal income tax is progressive so why not superannuation tax. But calculating the tax to be paid in this way - including unrealised earnings and then including those gains in calculating the amount above $3mn to be taxed is simply an intentionally punitive approach.

If there's any scope to negotiate the details before it's legislated, these would be the two areas I'd push for change:
- only earnings as has always been defined for trusts in the past (ie income and net realised gains)
- use beginning of year balances to calculate the % of earnings to be subject to tax.

Rob
March 02, 2023

Taxing unrealised gains is a total nonsense - is a straight out "wealth tax" and will never get through as next in line will be unrealised gains on investment property, unrealised gains inside Trusts etc

Geoff R
March 02, 2023

"Taxing unrealised gains is a total nonsense - is a straight out "wealth tax" and will never get through"

I agree that it is a wealth tax but I am not so confident that it will not get through.

I think the reason for it is that the ATO can see all your Super accounts (someone could have several/many) whereas each separate account only knows about itself. Doing it this way there is no extra admin burden for the individual super accounts - nothing there changes. Then the ATO combines super balances from your various accounts and does not have to worry about actual income/earnings - it is a simple calculation.

But perhaps in addition to adding super balances, the ATO could in fact add together all the earnings from your various accounts and use that? Would seem fairer than taxing unrealized gains which might NEVER be realized.



SMSF Trustee
March 03, 2023

OK to those who day that taxing valuation changes is "nonsense" I have to disagree. Every company has to mark their assets to market in calculating profit fir each year, on which tax is then paid even though that source of profit isn't cash. It's not nonsense, but it is a significant change in the way Trust Funds are taxed and in the way investments held outside super are treated. It's treating a portion of individual income in a way that's very different to what's ever been done in the past. Except in one sense. Every shareholder who pays tax on company profits at their marginal tax rate (see the imputation system) is thus paying tax on unrealised gains which are part of the profit that generated your dividends. I don't agree with this approach, but it isn't nonsense.

Nick
March 03, 2023

Hi Graham, I agree with you and with "SMSF Trustee" that the earnings calculation based on unrealised gains rather than income is punitive - and with this approach, Rob (below) is quite correct to call it a "wealth tax". This is the main sticking point with Treasury's approach to the additional tax. How can the government ethically justify a punitive wealth tax when it has being encouraging people to contribute to super for more than 30 years?

Mary
March 04, 2023

If you pay the unrealised gain tax from inside smsf is that considered to be a pension payment?

Scully
March 02, 2023

Good news that the onus won't fall on funds to come up with a convoluted method to determine the tax for specific individuals within a fund of potentially thousands of members.
Unfortunately, taxing the change in a person's balance will create all sorts of anomalies.
An example: Beth has a balance of $3 million, invested in the equity market. The market rallies 20%, Beth's balance increases to $3.6 million. I think that creates a tax liability of 15% x $600k x 1/6 = $15,000 which Beth pays. The following year, the market falls by 16%, the balance is now back to $3 million and Beth has a carry forward loss. She then moves $1.7 million to pension and is no longer troubled by the $3 million cap. Beth has had no gain over the 2 years but has paid additional tax. A contrived example but is not impossible.

HockeyMonkey
March 02, 2023

I understand the TSB includes both accumulation and pension balances so moving to a pension doesn't avoid the additional tax

https://www.ato.gov.au/individuals/super/in-detail/growing-your-super/super-contributions---too-much-can-mean-extra-tax/?page=7

Scully
March 02, 2023

You are right, pension is included.

Geoff R
March 02, 2023

"I understand the TSB includes both accumulation and pension balances so moving to a pension doesn't avoid the additional tax"

yes that seems correct. For example if you have ALL your Super in pension mode and choose some shares that skyrocket such that you now have more than $3 million in pension mode, you will still pay the extra tax.

Personally I don't like the idea of tax on unrealized profits - you may be forced to sell assets if you don't have cash lying around - and what if the price on the assets is now much lower than it was when the tax liability was incurred?

And better to refund tax on losses if you have previously paid tax on unrealized gains - rather than forcing you to carry them forward (and perhaps never being able to use them!).

Having said that, at least the proposed system is simple and won't place extra admin burden on super funds - especially where someone has multiple super accounts.

Mark
March 02, 2023

I see you have picked up on my comments of the likelyhood of a ban or limits on lump sum withdrawals in the future. I won't be surprised to see preservation age being raised in time now as we have a quirky condition with starting a TTR and full access to Super (subject to conditions) being 60yo for most of us now. I expect the TTR to stay at 60 and preservation age to rise.
TTR was 55 and preservation age 60 for most. A better idea in my view, some jobs are labour intensive and being able to transition away from those makes sense. Now most have to wait until 60 but then can not bother with a TTR, just say they are retiring, take all their Superannuation then say they have changed their mind and go back to work in a different job. Others can say they are retiring, take their Superannuation, pay off the mortgage and then go back to work in a different capacity. Having no mortgage may make that viable for some. Defeats the purpose of Superannuation though as it will now no longer part fund or fund ones retirement.

I think the $3M should be indexed

I also think if one is under preservation age, they should if they choose be able to take amounts over $3M out.

Same for employer contributions, you should have the choice to take them as salary or wages if you choose. Introduction of the Cap is basically saying that $3M is enough to fund or part fund ones retirement. If so, extra should be yours to do with as you choose, leave it in Super or take it out.

 

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