Proposed Superannuation Tax Increase: Extra 15% tax, where Funds have $3 Millions

The Federal Government has proposed that from the 2025-26 financial year, individuals with super balances over $3 million will face an additional 15% tax on earnings in respect of the portion of the balance above $3 million (Proposal). This is to address the Government’s claim that super tax discounts cost the federal budget more than $50 billion in lost revenue each year, and its plan to reduce concessional treatment for high super balances, as part of the government’s effort to curb tax concessions for the wealthy.

Approximately 80,000 Australians (around 0.5% of super account holders) are expected to be affected at first. However, the Proposal has drawn criticism from certain aspects of the media because:

• The $3 million cap won’t increase with inflation, so more people may be affected over time.
• The tax applies to both realised earnings (such as dividends) and unrealised gains (such as property value increases), which could create cash flow issues.

Although this change is not yet law – and details are still to be ironed out - the government is expected to negotiate with the new Parliament to get it passed. This article provides an overview of what the Proposal would mean and how it could affect self-managed super funds (SMSFs) with member balances over $3 million.

What is the Proposal?

In 2023, the Federal Government sought to implement the Proposal through legislation.[1]  That legislation was never passed, but having won the 2025 Federal Election, Labor is moving ahead with legislating the Proposal, aiming for it to come into effect from 1 July 2025.

If introduced, the increase in super tax will apply to individuals with a total superannuation balance exceeding $3 million at the end of each financial year.[2]  Earnings below this threshold will continue to be taxed at the existing rate of 15 per cent or less.[3]

Who is affected?

Individuals with superannuation balances exceeding $3 million will incur an additional 15% tax on earnings related to the portion exceeding the threshold. As such, the total tax on the relevant portion of superannuation earnings above the threshold, will be 30% (15% existing tax plus 15% additional tax to be imposed).

Stated Goals of the Proposal

The Proposal aims to improve fairness in the superannuation system by reducing generous tax concessions for high-balance accounts. These accounts typically belong to high-income individuals who would otherwise be subject to a 45% tax rate if their super earnings were added to personal income and taxed accordingly.

The Government has suggested that the Proposal targets people who have been using their super for tax minimisation purposes, as opposed to legitimately saving for their retirement. The Government’s claim is that the wealthiest 10% of Australians benefit from approximately $22 billion in superannuation tax concessions annually, by holding funds in superannuation and having the earnings on those funds taxed concessionally, rather than having them taxed as personal income at marginal tax rates.

The proposed changes apply to all types of super funds, including self-managed super funds (SMSF). However, defined benefit schemes will be treated differently due to their unique structure.

How will the changes to the tax be calculated?

While bearing in mind that the Proposal has not yet been legislated, the ATO has suggested that once the Proposal is introduced, the tax on super, known as ‘Division 296 tax’, will need to be calculated using a three-step proportional formula to determine taxable earnings. Put simply, the tax will be 15% of the proportion of super earnings that is attributable to the excess above $3 million, calculated as:

Earnings × Proportion of Earnings Attributable to Excess × 15%.

For example, if a taxpayer’s TSB on 30 June 2026 is $4.3 million, up from $4 million the previous year, and they withdrew $80,000 in the Financial Year, while contributing $30,000, then the calculation would be as follows

• Earnings = ($4.3M + $80K – $30K) – $4M = $350,000

• Proportion = ($4.3M – $3M) ÷ $4.3M ≈ 30.23%

• Division 296 Tax = $350,000 × 30.23% × 15% ≈ $15,875
  
  

It has been suggested that:

• the tax will be separate to an individual’s personal income tax;
• the tax can be paid out-of-pocket or from an individual’s superannuation funds;
• individuals who hold multiple superannuation funds can elect the fund from which the tax is paid; and
• following the change, losses will still be able to be carried forward to offset any subsequent Division 296 liabilities.
  
  

Objections to the Proposal

The Proposal has drawn mixed reactions in the following areas:

• Scope and Indexation: A major criticism is that the $3 million threshold is not indexed, meaning more people will be affected over time as inflation and wages grow.

• Fairness and Equity: The Proposal imposes a tax on both realised and unrealised gains. Critics argue the measure lacks capital gains discounts, does not adjust for how long assets are held, and may result in double taxation when assets are eventually disposed of.

• Complexity and Practicality: Stakeholders have flagged the technical complexity of the proposal, especially around how earnings and asset values will be calculated. Including both realised and unrealised gains, making the system harder to administer and understand.
  
  

How should advisers and taxpayers respond to the

Accountants and advisers should be aware of the nature of the changes, which, if implemented, will affect any taxpayer with a TSB above $3 million from 1 July 2026. Accountants and advisers should:

• Proactively identify clients with balances approaching $3 million and advise on potential tax exposure.

• Maintain detailed records of contributions, withdrawals, and asset valuations to support Division 296 calculations.

• Consider how the Proposal will alter advice and decision-making concerning super contributions - whilst the Proposal reduces the benefits associated with having a superannuation balance above the threshold, the 30% rate is still significantly lower than the higher income tax brackets.

• Ensure accurate and timely asset valuations, especially for illiquid assets like property or unlisted shares, due to the tax on unrealised gains.
  
  

More information from Maddocks

For more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of the Commercial team.

More Cleardocs information on related topics

• Federal Government Budget 2025/26: What it means for you
• Superannuation and succession planning: the importance of getting your house in order

Order related document packages

• Superannuation (SMSF) Documents
• Company Documents
• Business Services Documents

[1] Superannuation (Better Targeted Superannuation Concessions) Imposition Bill

[2] The relevant Treasury release concerning the proposal can be accessed via the following link - https://ministers.treasury.gov.au/sites/ministers.treasury.gov.au/files/2023-03/better-targeted-superannuation-concessions-factsheet_0.pdf

[3] See above