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Government’s changes to superannuation balances over $3 million – Part 1

Government’s changes to superannuation balances over $3 million – Part 1

What’s the proposed change?

This is a proposal only and has yet to go through the usual parliamentary process. If it does succeed, the start date will be from 1 July 2025 (ie. after the next Federal Election). In essence, the Government’s announcement proposes to tax superannuation accounts with a balance above $3 million at 30% and not the current 15%. It has also proposed to include all notional gains and losses (ie. unrealised) in taxable income on balances above $3 million.

The facts so far;

  • The measure is limited to those individuals who have more than $3m in super at the end of a financial year. Since it’s not due to start until 2025/26, it’s the balance in super at 30 June 2026 that matters initially. Therefore if someone had a balance of $4 million after 1 July 2025 and then withdrew $1 million, then it appears that the remaining balance of $3 million would not be affected;
  • It’s based on $3 million per person, not $3 million per fund;
  • The $3 million includes BOTH accumulation and pension accounts combined;
  • The $3 million won’t be indexed. This is a source of contention as in future years many more people will fall into the net. Normally, most super thresholds are linked to inflation making it more equitable.

How it will work?

Where you have more than $3 million in super at 30 June 2026, the new rules will apply as follows;

  • There will be a new, special extra tax (at 15%) on some of their super fund’s earnings
  • The tax will be levied on the member personally, not their fund.
  • They will be allowed to take money out of their fund to pay it.

The key words here are ‘some’ and ‘earnings’. Using an example, Tom has a super balance at 30 June 2026 of $4.5 million. Only a proportion of his ‘earnings’ will be subject to the special extra tax of 15% worked out as follows;

Total balance – $3 million           =  $4.5 mill – $3 mill        = 33.33%

Total balance                                      $4.5

Interestingly, the formula completely ignores the starting balance. This means that if your balance at 1 July 2025 was say $2.8 million and your investments have tracked nicely and increased in value so that your balance at 30 June 2026 was $3.3 million, then you are subject to the new rules for the whole of the year.

How to calculate ‘earnings’

Using our Tom example, assume at 1 July 2025 his balance was $4 million. During the year he made a downsizer contribution of $300,000 but he also paid himself a pension of $100,000.

His earnings are calculated as:

$4.5 mill – $4.0 mill + $100,000 – $300,000 = $300,000

The true earnings of the fund are adjusted for the pension (which would have decreased earnings) and the contribution (which would have increased earnings). By backing these out, you get the ‘true’ earnings of the fund.

Tom would pay the following special extra tax;

$300,000 x 33.33% x 15% = $15,000

Points to note;

  • Earnings include Unrealised Gains – the earnings used to calculated the special extra tax now include the growth on investments which have increased in value during the year and the 15% extra tax will be levied on this increase. Unfortunately where there has been a decrease in the value of investments, much like we are seeing at the moment, if this decrease is large enough to cause earnings under the formula to be negative, there is no tax refund. Rather, like a capital loss, it will be carried forward to offset against future earnings.
  • Cash flow will be an issue where, for example, the cash balance is not substantial enough to pay the $15,000 tax above. This would mean that Tom would have to sell investments for the tax that was based on a paper profit only! This could be a major issue where a fund’s only asset is a property which had increased substantially in value during the year (like our 2020-2021 property boom) and cash reserves are low. What happens here? It is inequitable to suggest that a member should sell a property to pay the tax on the increase in its value when it wasn’t sold!

It is important to note that at this stage all these proposals are draft only and there will be a process through Parliament before it becomes law and there are still a couple of years before it comes in.

The second blog will look at various strategies to consider if your balance is over $3 million but you can always come in and have a chat with us here at Stewart & Smith Advisory Pty Ltd.