Author: Emma Partenza, Manager, TAG Financial Services
The Government’s proposal to reduce superannuation tax concessions
The Government recently announced a proposal to introduce a limit on tax concessions received by members in their superannuation funds, stating it would ‘strengthen the system by making it more sustainable’. It is critical to stress that this is not yet law and greater details will follow from the Federal Government’s Budget in May 2023.
In a previous blog, we provided an 8 minute video interview where Michelle Griffiths talked to the The Education Network (TEN), about this extraordinary new tax on superannuation balances over $3M and what this may mean.
The Proposal
The potential introduction of a $3,000,000 cap is intended to limit tax concessions available to member’s who have total superannuation balances over this threshold, and tax earnings at an additional 15% tax.
Essentially, those who have greater than $3,000,000 will have their earnings taxed at 30%. The additional tax of 15% will only apply to a proportion of earnings on balances above this cap.
It is not intended for this cap to be indexed. The proposed commencement date is 1 July 2025.
How will it apply?
Under the proposal, any additional income tax on earnings for a member whose total superannuation balance is greater than $3,000,000, will be issued by the Australian Taxation Office. Similar to the current Division 293 assessments, the ATO will utilise information currently reported in the superannuation fund tax returns and issue notices directly to members. Superannuation funds will have no additional obligation to account for or calculate this tax in their yearly reporting obligations.
How are proportional earnings calculated and tax applied?
The member’s total superannuation balance at the end of a financial year will be compared to their total superannuation balance at the previous 30 June to calculate the earnings for the member. Withdrawals (pensions and lump sums) and contributions will be adjusted for, as to only reflect earnings.
Calculation Method
a) The formula below will be used for calculating earnings in a financial year:
b) The proportion of earnings corresponding to funds above $3 million is calculated as follows:
c) The tax liability is calculated as follows:
What if earnings are negative?
A negative return of earnings will be carried forward to be offset against earnings in future years and will reduce the additional tax paid on earnings above $3,000,000 in the future.
How is the additional tax paid?
Members will be able to elect whether to pay the additional tax personally, or from their superannuation fund. Where they may have more than one fund, they can elect which fund pays this additional tax.
The contentious issues
- No guidance on application to defined benefit interests.
- Death benefits:
- Death benefit pensions and reversionary pensions received on death of a spouse.
- Receipt of death benefits and retaining these amounts in superannuation, may now put a member above the $3,000,000 cap and applicable to pay additional tax on earnings, when previously they may have been well under.
- Benefits left to non-tax dependants may be liable to pay 15% on the full taxable component (meaning an effective tax rate of 45% on earnings).
- Calculation of earnings significantly different to superannuation fund taxable income and income tax paid:
- Unrealised capital gains
- Unrealised capital gains are not taxed for income tax purposes, until realised (and then, with capital gains tax discounts).
- Proposed calculation of earnings does not currently have any proposed adjustment to remove unrealised capital gains from having extra 15% applied to it.
- Unrealised capital gains
- Income taxes, excess contributions tax:
- Payment of taxes are reflected in a member’s total superannuation balance; will they be adjusted for in the calculation?
- Cashflow issues:
- For member’s personally (especially if they have low taxable income) or
- Superannuation fund (where it may have lumpy assets and trustees may not currently have to generate cash to pay pensions to members).
- Member’s balances decrease:
- The complexity and visibility (by members) of any carry forward amounts to be applied to offset any additional tax in future years.
- Any tax may be lost should a member withdraw a significant portion of benefits to remain under the proposed cap and avoid paying the additional 15% tax.
- Revaluation of assets:
- Will this proposal have trustees on the cautious end of revaluating assets, such as property, on the lower end of commercial market value to avoid (or limiting) how much it will impact their total super balance?
- Allocations from Reserves
How will this affect the Transfer Balance Cap?
No changes will occur with the Transfer Balance Cap and trustee’s still need to comply with it. Exempt Current Pension Income (ECIP) will still apply to retirement phase income streams.
When will this commence?
Effective date of the introduction of this proposal is currently 1 July 2025 (2026 financial year). Will not see any assessments issued until the following financial year.
What should members with greater than $3,000,000 in superannuation do now?
Nothing just yet as it is currently just a proposal. We still have 3 years to act before it may become law.
Superannuation is still the most tax effective investment vehicle and even though some members may have a proportion of their earnings taxed a little higher, it still may be the most tax effective place to hold their investments, compared to other entities. Tax benefit analysis must be considered on each individual on a case-by-case basis.
What’s next?
The Government has commenced the consultation process with the superannuation industry and key stakeholders. We should see greater detail around the implementation of this proposal in May’s Federal Budget.
Any questions?
If you have any questions, please contact us on 03 9886 0800 or via email.
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We will be taking a deep dive into this topic at our upcoming Superannuation Strategies Seminar.
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Disclaimer: The information contained is general in nature. Professional advice should be sought before acting on any aspect on this page. Financial planning services provided by TAG Financial Advisors Pty Ltd (ABN 77 154 205 017 AFSL 415632), a wholly owned subsidiary of TAG Financial Services Pty Ltd (ABN 67 075 374 686). Copyright 2023. Please do not reproduce without the expressed written consent of the author.