Understanding the new $3 million super tax

In February 2023, the Federal Government set the cat among the pigeons, announcing a scaling back of the tax concessions for superannuation balances over $3 million. 

It can be confusing and concerning to read about changes to super. So, let's take a look at what is expected to happen, who may be impacted, and when the changes take effect. 

As I write, the changes haven't yet been legislated. We could see some fine-tuning around the edges. That said, here is what we know so far about the so-called Division 296 tax change - so named for the section of tax legislation it relates to. 

In a nutshell:  

• From 1 July 2025, an additional 15% tax will apply to investment returns earned by superannuation accounts with a balance greater than $3 million at the end of the financial year.  
• The additional 15% tax is on top of the 15% tax already in place, bringing the total tax on super returns to 30%. 
• The extra 15% will only apply to the amount that exceeds $3 million. 
• Earnings that relate to the balance of up to $3 million will still be taxed at 15%. 

Who will be affected? 

Across all workers, the median super balance is well below $250,000. So, the new rule will not affect the majority of Australians. According to Assistant Treasurer Stephen Jones, just 0.5% will be impacted - about 80,000 people.

If we drill down into Tax Office data, the average super savings among members of self-managed super funds (SMSFs) is about $745,000 for women and $882,000 for men. This being the case, SMSF members may be most likely to be affected by the higher tax on investment returns. 

The main pain points 

Changes to superannuation are always disconcerting. Not surprisingly, the proposed Division 296 tax has been thoroughly scrutinised, and several potential pain points have emerged, including: 

• The legislation applies to total super balances

Simply shuffling super between different accounts is unlikely to provide shelter from the storm. 

The additional tax applies to 'total super balances' (TSB). Federal Treasury provides the example of a person with three separate super accounts, each with balances of $1 million, $700,000 and $2 million. In this case the TSB adds up to $3.7 million, so the account holder can be subject to the higher tax on super earnings. 

• Returns on super aren't always realised 

The additional 15% tax is set to be based on the difference between a member's opening and closing total balances for the year, after allowing for withdrawals, contributions and a few other exclusions.  This taxable difference will largely reflect gains on investments.  

However, one of the chief points made by various commentators is that investment returns on super are not always realised. Shares, which tend to be a key investment for many super funds, can fluctuate in value, especially over short periods. In a good year, when share values are soaring, our super balance can jump higher. The following year can see share markets dip with the potential to push super balances down.  

As the legislation stands, there is the possibility for the Division 296 tax to be levied on unrealised (on paper only) gains though negative returns can be carried forward to reduce the tax liability in future years. 

• Who pays the additional tax? 

The plan is that the additional 15% tax on fund earnings will be applied to an individual fund member, not the superannuation fund. Fund members can choose to pay the extra tax from their own pocket or withdraw it from their super fund.  

What to start thinking about

For anyone who may be impacted by the additional tax on super earnings it is important to get professional advice. Solutions may be available to minimise the impact of the higher tax on fund earnings. 

For instance, one person, who is part of a couple, may have super savings in excess of $3 million, while their spouse holds very little in super. Under the rules being proposed, a couple with an equal super split can potentially hold combined super of up to $6 million without being affected by the higher tax on fund earnings. 

Or, depending on your age, life stage and personal marginal tax rate, you may be able to withdraw funds from super and invest the money outside of super in a way that is more tax effective (though this requires careful research). 

The overriding point is that when the new legislation kicks in, there may be compelling reasons to ensure your total super savings don't go past the $3 million threshold. 

I stress the value of personalised advice here. There is no one-size-fits-all solution. What works for a friend, relative or work colleague may not be right for you. 

Is super still a good investment? 

Changes to super can rattle our confidence in Australia's super system. That's understandable, as we often work hard to grow our retirement savings. But I am still a big fan of super. 

A dinosaur like me can recall the introduction of a dreadful piece of jargon called the Reasonable Benefits Limit back in 1994. It capped the maximum super benefits a person could receive during their lifetime on a concessionally taxed basis. It too ruffled feathers back in the day, and thankfully, was scrapped in 2006. 

Fast forward to 2024, and there is an argument to say that Australia's $3.9 trillion super savings are an attractive pool of money for the government to target as a source of tax revenue. 

It's worth remembering though that more than two million of our retirees still rely on the age pension as a source of income. So, it's a no-brainer that successive governments will encourage us to grow our super rather than shy away from it. 

It's a fair bet that superannuation will always be subject to regulatory change. This highlights the value of growing investments outside of super as well as within a retirement fund. As always, diversification is the key to growing and maintaining personal wealth.