Extra tax on large superannuation balances

As usual, there is more tinkering with Superannuation. A new tax has been proposed in a Government consultation paper released on 3 October 2023.

The tax would apply from 1 July 2025 on that part of a taxpayer’s balance that exceeds $3 million. Obviously at that level, it is not expected to affect many people at the moment. However, in its current form there are two alarming features that may affect many younger people in the longer term.

  1. The $3 million limit is not to be indexed. We are currently in a period of higher inflation and the value of our savings is quickly diminished in real terms over time. As an example, if we have a 4% inflation rate over the next 10 years, the new tax will still apply to balances of $3 million. However, the value of that sum in real terms would be reduced to just over $2 million. Over 20 years this figure reduces to just under $1.4 million. Expect significant opposition to the absence of indexation as it will affect many more Australians in the longer term than our politicians want us to believe.
  2. The second feature is more obscure, where the new tax will be imposed on unrealised earnings as well as income. So if an asset rose in value during the year but was not sold, the taxpayer will pay tax on that paper profit. This does not occur in other areas of Australia’s taxation system. We typically only pay tax at the time of sale if there is a capital profit. There may be severe cashflow issues if a superannuation fund has to pay tax but has not sold any assets to fund the tax.

This additional 15% tax will only apply to the proportion of earnings that relate to a super balance that exceeds $3 million. Earnings below this threshold continue to be taxed at normal rates. As such, it may still be worthwhile for taxpayers to retain their super inside the system, if they are earning significant personal taxable income.