The prospect of a $3 million superannuation tax has generated much discussion in recent times. Leaving aside questions about its equity, for those with more than $3 million in superannuation savings, there are some basic steps to help prepare for the new tax.
There are three elements to the calculation of the proposed tax – the rate of tax, the proportion of the super fund’s balance over $3 million at the end of the financial year, and the fund’s earnings for that year.
Looking at the first two factors, the rate of tax is straight forward; it will be applied at a rate of 15 per cent. However, the proportion of the fund’s balance will vary for each person. Any action taken now depends on how far the current balance sits above $3 million.
Balance is important
For those people with superannuation balances significantly more than $3 million, it will be important to review the structure and investment approach of the fund. For someone with, say, $4 million in superannuation it might make sense to sit tight. They have 25 per cent of their balance over $3 million, therefore the extra tax rate on earnings becomes 15% x 25% which equals 3.75%. This rate is then applied to the third element, the earnings for the year, which is the movement in the fund’s balance, plus money taken out, less contributions (net of tax) put in.
Given that a fund normally pays no tax on pension account earnings, 15% tax on accumulation account earnings and only 10% tax on capital gains (after 1 year of ownership), the extra tax of 3.75% does not look too dramatic. So, for those with only a small proportion of their superannuation over $3 million, it may not be worth making wholesale changes to their approach. But for someone with $10 million in superannuation, for example, the amount over $3 million is 70 per cent, therefore the extra tax rate on earnings would be applied at a rate of 15% x 70%, which equals a rate of 10.5%.
One option outside of super for those building their investment wealth is establishing a personal investment company. These companies pay tax at 30 per cent but only on realised capital gains. Unrealised gains may be accumulated for years, deferring tax.
Family trusts might also play a role, but they may be less flexible. Trusts are required to distribute their profits each year which can be contradictory to building wealth.
Manage cash flows carefully
The tax will be levied even on unrealised gains, meaning people will need to pay tax on capital growth whether or not they’ve sold assets, which can include illiquid assets, such as property or investment in start-up companies that take time to mature.
This means some people may be liable for the tax but not have the cash to pay it. This will require some planning in advance to manage cashflow. In addition, getting timely valuations of investment assets will be important for self-managed superannuation funds (SMSFs) to calculate the unrealised part of the gain. However, getting realistic valuations for some assets may be difficult so again, advance planning will be important.
For those still some years away from retirement, consider how ongoing contributions and investment returns could push the super balance above the $3 million cap, especially given time and compounding returns. The $3 million threshold is not indexed for inflation. Many Australians will eventually be caught by the tax given their rising balances. Other considerations include planning for cash payouts such as a retrenchment payment from an employer, an insurance payout or an inheritance, which could unexpectedly push a balance over $3 million.
For those with low personal taxable income, but a superannuation balance above $3 million, it may make sense to take money out of super and invest it personally, or jointly with a spouse.
Time is on your side
The details may change if legislation is amended or not passed. If it passes, the new tax will apply based on total super balance as at 30 June 2026, not 2025. So, there is no need to withdraw funds pre-emptively or in a panic. Discuss it with an adviser first, because once money leaves the super system, getting it back in can be very difficult due to contribution caps.