Hot on the heels of the release of a consultation paper proposing a legislated objective for superannuation, the Government has called for a ‘modest adjustment’ to super tax breaks by proposing an additional tax on the earnings of those members with balances above $3 million.
Who will it affect?
From the 2025/26 year, it will affect those members who have a total superannuation balance (TSB) of more than $3 million at the end of each financial year. The government estimates this to be less than 0.5% of the superannuation population.
How will it apply?
The additional tax will be levied at 15% on a proportion of ‘earnings’ allocated to fund members.
The Australian Taxation Office (ATO) will administer this tax by using existing super fund reporting to calculate the TSBs of members.
How will it be calculated?
The calculation method is as follows:
|Earnings||TSB Current Financial Year – TSB Previous Financial Year + Withdrawals – Net Contributions|
|Proportion of Earnings||(TSB Current Financial Year – $3 million) / TSB Current Financial Year|
|Tax||15% x Earnings x Proportion of Earnings|
If the earnings calculation results in a loss, it will be carried forward to reduce the tax liability in future years, not refunded.
Treasury describes the change as bringing the headline tax rate on the proportion of earnings for those affected to 30%.
However, the additional tax is not calculated on taxable income. Instead, it is calculated on this new definition of ‘earnings’ made up of entirely different components that include non-discounted unrealised gains.
John has $4m in superannuation at 30 June 2025 and $4.5m at 30 June 2026. During 2025/26, he draws down $150,000 and makes $20,000 of concessional contributions into his fund. His contributions net of 15% tax are $17,000.
Earnings = $4.5m-$4m+$150,000-$17,000 = $633,000
Proportion of Earnings = ($4.5m-$3m)/$4.5m = 33.33%
2025/26 Tax = 15% x $633,000 x 33.33% = $31,650
Mary has $7m in superannuation at 30 June 2025 and $6m at 30 June 2026. During 2025/26, she draws down $400,000 and makes $20,000 of concessional contributions into her fund. Her contributions net of 15% tax are $17,000.
Earnings = $6m-$7m+$400,000-$17,000 = -$617,000
Proportion of Earnings = ($6m-$3m)/$6m = 50%
Earnings loss to carry forward = -$617,000 x 50% = -$308,500
Mary’s TSB increases to $7.5m at 30 June 2027. During 2026/27, she draws down $400,000 and makes no contributions.
Earnings = $7.5m-$6m+$400,000 = $1.9m
Proportion of Earnings = ($7.5m-$3m)/$7.5m = 60%
2026/27 Tax = 15% x (($1.9m x 60%) -$308,500 b/fwd) = $124,725
How will it be assessed?
The tax will be levied on the members, not the super fund.
Members will have the option of requesting a release from their funds to pay the tax, similar to other super-related taxes.
When will it apply?
It will apply from 1 July 2025. A member’s TSB as at 30 June 2026 will become the first important measurement date.
The first notices of tax liabilities for the 2025/26 year are likely to be issued late in the 2026/27 year.
- The $3m threshold will not be indexed. This may capture many more members in years to come due to inflation over time. The 0.5% of total members affected is likely to rise considerably.
- The government has opted for simplicity in calculating the additional tax based on its definition of earnings that includes unrealised gains. However, this contradicts normal taxing principals and has the potential of assessments being made purely on market movements, impacting cash flow.
- There is little detail at this stage as to what is included in ‘withdrawals’ and ‘contributions’. For example, the death of a spouse could result in the surviving spouse getting caught under these rules, either by inheriting a reversionary pension or commencing a death benefit pension that takes them above the $3m threshold. Are these pension values to be treated as ‘contributions’ for this purpose?
- No distinction is made between pension and accumulation balances. This means that a super balance in full pension that has grown in excess of $3m at 30 June 2026 continues to generate tax-exempt income but will be subject to the new tax.
- Treasury has not addressed defined benefit interests and will be consulting on the appropriate treatment.
Where to from here?
Although the measures are due to start from 1 July 2025, they will need to go through the usual parliamentary process before they become law. We would expect further consultation, a little more detail and perhaps some tinkering of the proposals between now and then.
Issues that may come into play:
- Another reason to consider ‘equalising’ spouse superannuation balances by implementing contribution splitting, or withdrawal and re-contribution strategies between spouses, where applicable.
- More focus on liquidity in the investment strategies of certain super funds.
- More scrutiny on valuations in view of the new tax on unrealised gains.
While there may be some hesitancy in retaining more than $3m in super, any alternatives would need to be carefully considered and discussed with your relevant advisors.
The expectation is that there will likely be more to come in terms of superannuation tax, so this topic is a definite ‘watch this space’.