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Understanding the Tax Changes to Super Balances Over $3m

Superannuation Balances

On February 2023, the Australian government proposed changes to the taxation of superannuation funds that will take effect in July 2025. These changes will affect individuals whose total superannuation balance exceeds $3 million including those in a self managed superannuation fund. The proposed changes aim to ensure that the superannuation system remains sustainable and fair for all Australians. 

In this article, we will explore the proposed changes to the taxation of superannuation funds and what they will mean for individuals with superannuation balances of $4 million, $5 million, and $10 million. 

Proposed Changes 

Under the proposed changes, individuals with a total superannuation balance of more than $3 million will face additional taxation on their superannuation earnings. Specifically, these individuals will be subject to a 15% tax on the earnings of their superannuation funds above $3 million. 

Currently, individuals are only taxed on the earnings of their superannuation funds if they exceed $1.7 million. This means that individuals with superannuation balances between $1.7 million and $3 million do not pay any additional tax on the earnings of their funds. 

The proposed changes will only affect a small percentage of Australians, as only a small percentage of individuals have superannuation balances of more than $3 million. However, the changes are expected to generate significant revenue for the government, which can be used to fund essential services and infrastructure. 

Impact on Individuals 

The impact of the proposed changes to the taxation of superannuation funds will depend on the individual’s total superannuation balance. In this section, we will explore what the changes will mean for individuals with superannuation balances of $4 million, $5 million, and $10 million. 

Superannuation Balance of $4 Million 

An individual with a superannuation balance of $4 million will be subject to additional taxation on the earnings of their superannuation fund above $3 million. Specifically, the individual will be subject to a 15% tax on the earnings of their fund between $3 million and $4 million. 

For example, let’s say that an individual has a superannuation balance of $4.5 million and their fund earns 6% per annum. Under the current system, the individual would pay tax on the earnings of their fund above $1.7 million, which would be $102,000 per annum (assuming an earnings rate of 6%). 

Under the proposed changes, the individual would be subject to a 15% tax on the earnings of their fund above $3 million, which would be $75,000 per annum (assuming an earnings rate of 6%). This means that the individual’s total tax bill would be $177,000 per annum. 

Superannuation Balance of $5 Million 

An individual with a superannuation balance of $5 million will also be subject to additional taxation on the earnings of their superannuation fund above $3 million. Specifically, the individual will be subject to a 15% tax on the earnings of their fund between $3 million and $5 million. 

For example, let’s say that an individual has a superannuation balance of $5.5 million and their fund earns 6% per annum. Under the current system, the individual would pay tax on the earnings of their fund above $1.7 million, which would be $156,000 per annum (assuming an earnings rate of 6%). 

Under the proposed changes, the individual would be subject to a 15% tax on the earnings of their fund above $3 million, which would be $120,000 per annum (assuming an earnings rate of 6%). This means that the individual’s total tax bill would be $276,000 per annum. 

Superannuation Balance of $10 Million 

An individual with higher superannuation balances like a superannuation balance of $10m will also understandably be subject to the proposed changes.   

For example if a person had a superannuation balance of $12m and they enjoy fund earnings of 7% their superannuation fund will enjoy $840,000.  Under the current system (assuming that their transfer balance cap is $1.7m) they will enjoy $119k of tax free income and the balance of that income ($721,000) will pay tax at the rate of 15%. 

Under the new system the tax paid on the excess of $3m will incur an additional tax of 15% (so 30% in total).  This means that $560k of that income is now taxed at 30% and not 15%. 

So in this example the superannuation fund will incur an additional $84,000 in tax a year. 

Long term tax planning strategies 

If your fund is generating large amounts of income in 2026 from long tail investments it might be worthwhile finding a way to drag the income forward into the 2023, 2024 and 2025 tax years so that the income is taxed at 15% and not 30%. 

Dealing with large illiquid assets 

If your fund holds large illiquid assets you might need to consider how the fund will cashflow pay the tax liabilities.  The earnings of the fund will include the increase in unrealised capital gains so the notional income of the fund is important compared to the actual cash enjoyed. 

Low value high value member balances across couples 

If your spouse has a low superannuation fund balance and you hold a high superannuation fund balance (or vica versa) it might be worthwhile to consider how you can focus the contributions and earnings in your spouses superannuation fund at the expense of your own superannuation fund.  Even if you are looking at the Downsizer Super Contribution you might want to do that in the low value superannuation balance first.  

Other investment structures 

Superannuation funds are not the only way that you can hold assets.  You can still enjoy tax benefits by holding assets in a company, a trust or even personally.  However even if your superannuation fund is paying tax at the higher 30% rate it is also worth noting that this tax is a final tax.  So getting a clear understanding on the tax benefits and downsides of a SMSF is important.  

If you compare other tax structures – like a company – the 30% tax paid by a company is not the final tax.  The earnings in a company will also trigger an extra top-up tax when the funds are taken out of the company and spent personally.  

Managing an inheritance 

While your personal super balance may not become close to the $3m threshold you should consider forward planning if your spouse is bequeathing their super fund to you.  If you hold say, $2m in superannuation, and your spouse passes onto you their $2m in superannuation you will now have $4m – and potentially attract the 30% tax rate. 

A final word 

This draft piece by the Albanese government is not yet law.  And we have an election between now and then.  Given that the draft legislation is not yet out it is important to remember that many draft pieces of tax law fundamentally change by the time the final law is passed and goes through the community groups. 

Getting great tax advice about structuring your superannuation fund is critical for the long term tax planning and success for a family.  At Westcourt we are a focussed firm – we only help families in business – so our entire training and practice consideration is delivered towards one core target segment.  Also our advice is independent and not linked towards promoting investments or increasing funds under management.  And given our deep international network we are well placed to help you navigate the international tax advice needed for superannaution funds looking offshore as well as locally.   

Given the proven tax leadership of Westcourt we are a natural choice for smart families that own businesses to leverage their superannuation fund through the tax system – so why not give us a call? 

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