Treasury has released additional information in relation to the proposed changes for superannuation balances exceeding $3 million, and there are further changes taxpayers need to be aware of.
Currently, earnings from superannuation are taxed at a concessional rate of up to 15 per cent. The proposed change, expected to be applicable as from the 2026 financial year, will apply an additional 15 per cent tax on earnings for individuals with super balances over $3 million.
This additional tax will be based on a formula incorporating Total Superannuation Balance (TSB) instead of taxable income. TSB is generally recognised to be the total value of a member’s superannuation benefits at the end of a financial year, including their accumulation phase values, retirement phase values, pending rollovers and some outstanding limited recourse borrowing arrangement amounts.
While this change has not been finalised or legislated, this specific formula-based approach may present numerous challenges, including valuation of unlisted investments, asset allocation and liquidity, and potential tax on unrealised gains.
This additional tax is expected to be levied on the individual and not the superannuation fund. However, the individual can elect for their superannuation fund to pay the tax. The tax collection mechanism will be similar to the collection of Division 293 tax on concessional superannuation contributions for high income earners.
This proposed change is expected to affect around 80,000 people, or 0.5 per cent of Australians with super.
Transfer Balance Cap (TBC) Indexation
The TBC limits the amount an individual can move into tax-free retirement phase. Currently set at $1.7 million, the TBC is due to increase by $200,000 on 1 July 2023. This means individuals who start their first pension phase account will have a transfer balance cap of $1.9 million.
Individuals who did not fully reach their cap in full in prior years may be able to benefit from a proportionate increase in their TBC. Unfortunately, no increase will be available to individuals who have fully maxed out their TBC in prior years.
Some individuals may want to delay the start of their pension account until 1 July 2023 to benefit from the upcoming indexation.
Superannuation Guarantee (SG)
As from 1 July 2023, the general employer SG will increase from 10.5 per cent to 11 per cent. The maximum contribution base used to determine the maximum limit on any individual employee’s earnings base for each quarter will also increase from $60,220 to $62,270.
Due to the sensitive nature of SG contributions and its strict payment due dates, a review of payroll software, including parameters to ensure compliance, is highly recommended.
Contributions caps remain unchanged
While the TBC and SG are both increasing as at 1 July 2023, the yearly concessional and non-concessional caps remain unchanged, at $27,500 and $110,000 respectively.
Co-authored by Timothy Wong, Assistant Manager, Business Advisory Services, HLB Mann Judd Melbourne. This article was first published in the Winter 2023 issue of Financial Times.