About the proposed super tax on those with over $3M

Sometimes retirement planning is as much about rules as it is about savings. And rules don’t always stay the same. When circumstances change, it might be time to revisit your strategy to ensure you are still working toward the best outcome. You may have heard about the proposed super tax on balances over $3 million, where an extra 15 per cent tax would apply. This tax relates to the earnings on the portion of the balance above $3 million. It is a little complex, but we will explain.

At First Financial, we help clients build wealth to enjoy a financially free retirement.

Our retirement plans are comprehensive and consider all aspects of your savings, superannuation and other assets.

This proposed change is particularly relevant for retirees and those with higher super balances. It is a complex and contested measure that has sparked discussion about how wealth is managed in later life.

The proposed change would see an additional 15 per cent tax applied to earnings on the portion of a person’s super balance that exceeds $3 million. This is on top of the existing tax arrangements already in place for superannuation.

What’s important to understand about this proposed tax is that it applies to unrealised gains. Under normal tax rules, you only pay tax when you sell an asset or receive income like dividends. With this tax, however, fund members would have to pay on the increase in value of their investments, even if nothing has been sold and no cash has been attained.

This shift has prompted debate about how investors can fund the tax without selling assets, and whether it creates unintended pressure on long-term investment strategies.

The calculation begins with determining what is called Division 296 earnings. This figure reflects the change in your superannuation balance over the financial year, adjusted for certain inputs. It is calculated as your balance at the end of the financial year minus the greater of your starting balance or three million dollars. From this amount, contributions made during the year are subtracted, and withdrawals or pension payments are added back. This establishes the earnings that are attributable to the portion of your balance above the threshold.

Once that number is determined, the taxable proportion, which is the proportion of your total balance above three million, is applied. This calculated by subtracting $3m from your balance at the end of the financial year and dividing by your balance at the end of the financial year.

The resulting tax is calculated by multiplying 15% by the earnings and also by the taxable proportion.
Contributions, withdrawals and pension payments are adjusted to give a fair picture of how your account has grown. Concessional contributions are deducted after allowing for the tax already paid on them. Withdrawals and pension payments are added back because they lower your balance but do not count as actual losses in value. These adjustments help prevent the earnings figure from being overstated or understated.

If your investments fall in value over the year, the loss does not result in a refund. Instead, it is carried forward and used to offset gains in future years when Division 296 earnings are worked out. Losses still help reduce what you might owe later, but they do not provide any immediate relief.

Taxing investment growth before it is converted into income or cash has drawn strong criticism. Many argue that tax should apply only to wealth people can actually access, not to fluctuations in the value of their assets. This has led to questions about whether the proposed measure fits with the purpose of superannuation as a long-term savings structure.

For retirees with high balances, this also raises practical concerns about how to fund the tax. Many large super balances are tied up in assets that do not produce much cash income.

If the tax is based on gains that exist only on paper, some retirees may be forced to sell investments or draw from other resources to meet their obligations.

There is also the risk that the proposal could distort investment behaviour. Members and funds may avoid certain asset classes altogether if they believe the risk of large unrealised gains outweighs the benefits. Others may shift toward more conservative, liquid investments to minimise the chance of being exposed to a tax bill they cannot easily pay.

It is important to understand exactly how much of your super balance would sit above the proposed three million threshold. Having a clear figure gives you a realistic sense of what the tax could mean for you and what adjustments, if any, might be worth thinking about.

Considering how the proposed tax could affect liquidity needs in the years ahead is also important. Retirees may want to evaluate whether their current mix of investments provides enough accessible cash or income to meet future obligations without having to sell assets unexpectedly.

The proposal is still before Parliament, and the details are not yet settled. However, if this super tax is likely to impact you, it’s worth sitting down with your financial adviser to understand what is known so far and how it could affect you. They can look at your entire financial picture and help you make measured decisions regarding your retirement plan.

For those likely to be affected, we know this is an issue you’ll be watching closely. Current estimates suggest only a relatively small number of people (around 80,000) would be impacted in the first year, though this could change over time.

Whatever changes come to superannuation and tax, at First Financial, our experienced advisers can help you build a retirement plan that supports the lifestyle you want in the years ahead.

To learn more about the proposed super tax on balances over $3 million or to start planning for your future, get in touch with our team today.