On 28 February 2023, the Federal Government announced it would reduce the superannuation tax concessions available to individuals whose total superannuation balances exceed $3 million. The changes will apply from 1 July 2025.
The proposed reforms will increase the headline tax rate of future earnings for balances above $3 million to 30 per cent (from the current rate of 15 per cent). Earnings which relate to assets below the $3 million threshold will continue to be taxed at 15 per cent or 0 per cent if held in a retirement pension account.
Treasury has now released a consultation paper entitled; Better targeted superannuation concessions which provides an overview of the proposed model for identifying who will be affected by the reforms, how the tax will be calculated and what the new rules mean for individuals and trustees of both SMSFs and APRA-regulated funds. The report is a significant step in the Government's consultation process and interested parties are being invited to comment on the paper.Sam McKenzie
The ATO determines the total superannuation balance (TSB) of all individuals on an annual basis by utilising information provided by the individuals superannuation fund(s). Individuals can check this figure via the ATO online services, which can be accessed via myGov.
New measures will be introduced to restrict high net worth individuals from accessing certain superannuation tax concessions. Treasury have advised that the measures will commence on 1 July 2025, meaning the first test date, being the date at which an individuals TSB is determined, for the policy will take place on 30 June 2026. Therefore, individuals with a TSB greater than $3 million as at 30 June 2026 will be liable to pay the higher rate of tax for earnings above the $3 million threshold. The threshold applies specifically to individuals and will not be shared between spouses or family members, or between other individuals who have interests in the same fund, such as a SMSF.
To avoid the practical difficulties of applying the additional tax at the fund level, the ATO will levy the additional tax directly on individuals (although individuals will have the option to release funds from super to fund the tax). The tax will be separate to personal income tax and consequently individuals will not have the capability to reduce the amount of tax payable by applying deductions, offsets or losses available under the personal income tax system.
For TSBs exceeding the $3 million threshold for a particular year, the relevant individual will incur an additional flat rate tax of 15 per cent on the proportion of earnings attributable to their balance over $3 million. This is reflected in the below formula.
Tax Liability = 15 per cent x Earning x Proportion of Earnings
The elements of this formula are described in more detail below.
Treasury have advised that their proposed approach to determining earnings, which remains subject to stakeholder submissions, is intended to be simple and minimise unnecessary or additional compliance costs. This is achieved largely by relying on data reported by superannuation funds through existing arrangements.
In calculating the earnings of a fund, the ATO will determine the difference between the individuals current year TSB (adjusted for withdrawals and contributions) and the previous financial year TSB. In making this determination the following three components are important.
Component 1: Total Superannuation Balance (TSB)
The TSB is a pre-existing superannuation calculation which is currently used to determine whether an individual is eligible to carry-forward concessional contributions or to make non-concessional contributions.
An individuals TSB is determined by combining the value of the individuals accumulation phase interests, retirement phase interests, in-transit rollovers and certain outstanding limited recourse borrowing arrangements, less any personal injury or structured settlement contributions paid into superannuation.
The difference between an individuals TSB at the end of the financial year and the TSB from the previous financial year represents the foundation of the earnings calculation. This amount (regardless of whether this is a positive or negative amount) is then adjusted to account for inflows and outflows that impact the closing TSB either positively or negatively. Thus, ensuring that only earnings generated inside the individuals superannuation is captured by the calculation and ultimately subject to the higher tax rate.
Component 2: Withdrawals
Any withdrawals made by the individual from their superannuation are added back to the current TSB for the purpose of determining earnings. This ensures that a decrease in an individuals TSB as a result of a withdrawal can't be exploited to reduce earnings or erroneously interpreted as negative earnings generated inside the individuals superannuation
Component 3: Net Contributions
The final component of the Earnings calculation is the subtraction of the value of after tax (net) contributions on the closing TSB. This adjustment is necessary to ensure that an individuals TSB does not capture contributions made by the individual throughout the year.
In the event of investment losses or fund expenses an individual may suffer a reduction of their TSB from one financial year to the next. If this occurs, the individual will not only avoid payment of the higher tax rate for the financial year in question but will also have the ability to offset positive earnings in future years.
Proportion of Earnings subject to the additional tax rate
The additional flat tax rate of 15 per cent is to apply only to the individuals earnings which can be attributed to the individuals TSB that is over the $3 million threshold. This is achieved by determining the proportion of the individuals TSB for the current financial year that is over $3 million, therefore, ensuring that the individuals earnings attributable to their below $3 million TSB does not attract the higher tax rate.
As the calculation methodology utilises the well-established TSB, as opposed to realised losses and gains, the earnings amount will controversially capture and tax unrealised gains.
In practice, if an individual has investments in their superannuation which have increased in value and as a result of the increase the individuals TSB exceeds $3 million as at the end of the financial year this individual will have triggered the higher tax rate. This is regardless of whether the increase in value of the investments have been realised or not. This hypothetical investment could then lose significant value, thus causing the individuals TSB to fall below $3 million. In this scenario, the individual will incur the higher tax rate whilst the value of their investments is at or near its peak value and will then return to the current 15 per cent tax rate once below the $3 million threshold.
Critically, the individual in the above scenario will not necessarily obtain the benefit of the loss in their investments value. In theory, the loss of earnings would be utilised as carry forward losses to offset future earnings, however, this will only occur if the individuals TSB, at some point in the future, returns to above $3 million.
In the lead up to the commencement of the new superannuation tax measures, we recommend that all individuals and superannuation trustees consider whether their superannuation balances will exceed or approach the $3 million threshold amount. Identifying whether the new tax rate will apply to an individual will be pivotal in assisting that individual in making appropriate financial plans in anticipation of incurring the additional tax liability and to take necessary steps to ensure compliance with the new measures.
As set out in their consultation paper, Treasury have advised that the changes are expected to apply to less than 80,000 people by 2025-26. However, it is important to remember that the $3 million threshold amount is not indexed, therefore, the higher tax rate is expected to impact more Australians in the long-term.
For more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of the Commercial Practice Group
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Qualifications: LLB (Hons), BEc (Hons), Monash University
Leigh is a Partner in Maddocks Tax and Structuring team. Leigh has extensive experience in advising Australian and multinational companies, high net worth individuals, accountants and financial advisers on all areas of taxation law.
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