Extra Tax for Superannuation Members: What You Need to Know!

Do you have $3 million or more in superannuation—or expect to reach that threshold in the next few years? 

Firstly, congratulations. Secondly, did you know it could create an increased tax burden?

In February 2023, the Federal Government announced a new super tax. In short, the powers that be are set to tax earnings on super balances of $3 million or more at 30%—double the current rate of 15%—from 2025 onwards. 

That’s a massive hike.

So what does this change mean? How does it work? Are there any concerns? Let’s dive into the details…

When Will the Change Kick In?

The tax hike, which will impact individuals who have super accounts totalling $3 million or more, is due to be implemented on July 1, 2025—after the next federal election.

The date coincides with a new financial year, so the super balance to be mindful of is your total as at June 30, 2026.

Hypothetically, that means if you have a sizeable super fund and decided to withdraw everything above $3 million in June 2026, you would not be liable to pay tax at the increased rate.

Why Is the Government Making This Change?

In a nutshell, it’s a revenue-raising initiative. The Federal Government stated that the change “is consistent with (its) proposed objective of superannuation, to deliver income for a dignified retirement in an equitable and sustainable way”.

It anticipates the adjustment to tax breaks will “generate revenue of about $2 billion in its first full year of revenue after the election”.

How Many People Are Expected to Be Impacted?

The government anticipates that the change will hit about 80,000 Australians.

That’s a small percentage of the country’s population, but the number is likely to grow. That’s because the $3 million will not be indexed—or at least initial government communications indicate this—so it won’t increase with inflation. 

Obviously, $3 million in a few years’ time will be worth less than what it’s valued today, so this tax is likely to have a wider-reaching impact in coming years.

How Will the Tax Be Paid?

If you’re liable to pay the special tax, you’ll be notified by the Australian Taxation Office (ATO).

The government has specified that you could choose to pay the tax out-of-pocket or from your super fund. If you have multiple superannuation funds, you have the ability to nominate the account from which the tax is paid. 

Note: The tariff is separate to an individual’s personal income tax, similar to the way in which Division 293 tax is applied.

What Does It Mean for Couples?

If you’re teetering on the edge of a combined $6 million total, there is some good news.

The $3 million target is applied per person rather than per fund. This means a couple with just shy of $6 million in super could dodge the tax increase—as long as the super is split so that neither party exceeds the $3 million per person. 

How Does the Tax Work?

This new measure won’t be implemented as an adjusted tax rate on the taxable income earned by super funds. For those affected, there are three key takeaways:

• There will be a special extra tax of 15% on some of your super fund earnings.
• The tax will apply to you personally, rather than to your fund.
• You have an opportunity to take money out of your fund to pay the tax (as noted earlier).

The 30% rate applies only to the portion of your earnings relating to the part of your account balance in excess of $3 million.

Earnings relating to the balance up to $3 million will continue to be taxed at 15%.

To quote from the official Federal Government factsheet, “earnings are calculated with reference to the difference in total superannuation balances (TSBs) at the start and end of the financial year, adjusting for withdrawals and contributions”.

There is capacity for negative earnings to be carried forward and offset against the tax in future years’ tax liabilities.

It’s worth noting that the magical $3 million number includes your entire super amount—so, where applicable, both accumulation and pension accounts combined. 

The government has outlined its calculation method and several examples that might apply as part of its factsheet. See more here. 

Are There Any Concerns?

While the factsheet is informative, it fails to highlight several possible scenarios that might be detrimental to you.

Some concerns centre around how earnings are applied. Earnings mean anything that creates a spike in your super’s account balance—including growth in assets that a fund hasn’t sold.

For an asset-rich super account that’s liable for this extra tax, a lack of cash flow might become an issue that didn’t exist prior to the introduction of the tariff. 

But there’s a more worrying hypothetical…

Let’s say that property is among the assets held by your fund. Remembering that earnings includes growth in unsold assets, there is a chance that ‘down the track’ the perceived value of your asset doesn’t measure up to its actual value.

That creates a problem if the difference between the perceived value and the actual value (which won’t be realised until a later date) is the tipping point to exceeding the $3 million super balance.

As this special tariff must be paid in advance, it could leave you in a situation where you’ve paid a bill that, as it turns out, wasn’t warranted. 

While recognising that there are several ‘ifs’ in this scenario, it’s still worth stating that in such a circumstance the government won’t grant a tax refund. Instead, you would be able to carry this loss forward and use it to reduce earnings in a future year—cold comfort if you’ve already forked out the cash.

Even if your super is well over the $3M figure, this calculation would exacerbate your total and lead to an increased tax bill.

What Can I Do to Prepare?

There’s a lot to digest here and we’re ready to help. 

If you’re concerned about how this special super tax might impact your financial future, speak to the team at Prime. We offer expert financial advice without the jargon.

Email [email protected] to chat today, so we can start planning for tomorrow. Because possible starts here.