On this page
Another year and yet another announcement from the Australian government on intended changes to our superannuation system! No wonder the overall confidence with the retirement savings incentives in Australia continues to decline.
A quick look at the proposed changes
Commencing 1 July 2025, the tax rate levied on super fund earnings for members with balances above $3 million will double from 15% to 30%.
Some of the key points to note with these proposals include:
- The proposed changes are not designed to apply a specific limit on super fund account balances. They are designed to apply a higher rate of tax on fund earnings for balances above $3 million.
- The higher tax rate applies to future earnings from 1 July 2025 and it will not be retrospective. However, there may be a “retrospective” effect for super funds carrying existing unrealised capital gains on fund assets.
- The $3 million cap is applied per member and not per fund.
- The proposed increase in tax payable only applies on earnings above the $3 million threshold.
- The $3 million threshold will not be indexed for inflation, so more people will be subject to the 30% tax rate over time as super balances increase.
Although these proposed changes apply to most superannuation fund types, they will have a much greater effect on the members of SMSF’s due to their higher average member balances and the investments held within these funds.
We look forward to seeing the finer details on how the government plans to implement these changes for their own defined benefit funds and even the older Parliamentary Contributory Superannuation Scheme.
Why the need for change?
Australia’s superannuation system is currently structured to provide generous tax concessions that encourage personal retirement savings. These retirement savings can then be used to provide a level of self-sufficiency in our retirement; effectively reducing the ongoing reliance on government support.
However, these tax concessions are often used by people with the means to save more than required for their retirement; using super as an effective tax planning tool.
When we see individual SMSF balances that exceed $400 million, most people would question just how equitable the overall system really is and whether the tax concessions given to these mega funds are still fair.
Do we need to rethink our retirement savings strategies?
For most of us, there will be no need to change what we are doing. However, if you already hold more than the new proposed $3 million cap in super, or will in years to come, you may need to consider whether a super fund is still the most appropriate vehicle to hold all of your retirement savings or whether other investment vehicles should be used in conjunction with your super fund.
It may be that we start to see compulsory super contributions and tax-deductible contributions continuing to flow into the superannuation environment, but monies that would otherwise have been contributed to super after tax (non-concessional contributions) moved into other investment structures to limit the effect of the higher tax rate on balances above the $3 million cap.
These other investment vehicles may not receive the overall tax concessions given to super funds, but they are also not subject to the usual contribution limits or investment restrictions that apply within the super fund environment.
What other options exist?
Investment structures to consider alongside your super fund include companies, trusts or partnerships. In some cases, these alternatives can provide a benefit from both a taxation perspective and also for asset protection.
It is also worth noting that, in some cases, simply investing in your own name can work. Keep in mind that the first $18,200 of income earned is free from income tax.
Investment companies
- Earnings are taxed at 30% (for most).
- Profits DO NOT need to be paid out each year. They can be held within the company and used for further investment or other purposes. In some cases, this could assist with intergenerational wealth transfer.
- When profits are distributed, they are paid to shareholders as dividends.
- Dividends paid out can include franking/imputation credits for tax already paid by the company and ensures that you don’t then pay personal tax on these same amounts.
- If your tax rate is below the company rate, you may be eligible for a tax refund.
Investment trusts – unit trust
- Profits need to be paid out each year. If profits remain unpaid, and held within the trust, then tax issues can arise.
- Unit trusts are set up with identifiable unit holders, with each unit representing an interest in the underlying trust assets.
- Trust profits are paid to the unit holders, and this can provide a tax advantage where those recipients have little or no other income.
- In some cases, trusts can assist with both asset protection and intergenerational wealth transfer.
Investment trusts – family (discretionary) trust
- Profits need to be paid out each year. If profits remain unpaid, and held within the trust, then tax issues can arise.
- Family trusts often do not have unit holders; they are discretionary, whereby the trustee of the trust can elect who is to receive any distribution.
- Beneficiaries or class of beneficiaries are usually set out in the trust deed of the trust.
- Profits are paid to the beneficiaries of the trust by way of distributions; in many cases, this can provide a tax advantage where those recipients have little or no other income.
- In some cases, trusts can assist with both asset protection and intergenerational wealth transfer.
Individuals
- Tax is levied at marginal tax rates, which range from 0% to 45% (excluding Medicare)
- The first $18,200 in earnings could be tax free where you have no other income. For example, a term deposit of $360,000 earning a 5% per year return would provide interest of $18,000.
- Keep in mind that you are the legal owner of the asset, and these assets are not protected from legal action.
The bottom line
The proposed tax increase on super balances above $3 million has come as a surprise to many.
If you are concerned about how these proposed changes could affect you and the amount of tax that you may be required to pay, consider what changes you could make to get the best outcome for you and your family.
Remember though, tax is only one aspect that needs to be considered.
Hi Garth, I think that we need to be careful about calling this as a 30% tax rate as this will never really be the case. There are some very good articles on the Firstlinks website detailing the real calculation methods and the fact that it amounts to an additional up to 15% tax surcharge on the Super earnings particularly as it’s only on the proportion the the earnings deemed (including unrealised gains) to be allocated from those assets that are above the $3M mark, ie only 25% of income if the balance was $4M.
It may also be the case that 0% tax is being paid on the base income generated if that income is generated from a pension account that has grown to be in excess of $3M, although unlikely at the moment definitely not impossible in future years especially if starting at $1.9M next year and drawing down minimum pension amounts. I estimate my own account will be there within five years.
Regards Mark