Tax hike on super balances above $3 million: Is it time to rethink our retirement savings vehicles?

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 retirement, effectively reducing ongoing reliance on the Age Pension.

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 self-managed super fund (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 $3 million 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 super, but monies that would otherwise have been contributed to super after tax (non-concessional contributions) being 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 same contribution limits or investment restrictions as super.

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 tax perspective and asset protection.

It’s also worth noting that in some cases, simply investing in your own name can work.

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 with no tax.
• If you factor in the low-income tax offset, individuals could have an effective tax-free threshold of $22,866 in the 2026–2027 financial year.
• Remember that you are the legal owner of the asset, and these assets are not protected from legal action.

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.
• Dividend payments can include franking/imputation credits for tax already paid by the company, which ensures 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 a 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, and this income is included in the assessable income of those beneficiaries. 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.

Insurance bonds

• While insurance bonds offer tax advantages and investment flexibility, they may not be suitable for everyone, and you should seek personal financial advice.
• These are a type of investment product offered by life insurance companies, designed to be a tax-effective, long-term investment option.
• Earnings within the bond are taxed at a maximum rate of 30%, which can be advantageous for individuals on higher marginal tax rates.
• If the bond is held for at least 10 years, no additional tax is levied on the investor when they withdraw.

The bottom line

If you are concerned about how these 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.

Carefully consider the overall outcome of making large, additional personal super contributions.

And remember, tax is only one aspect that needs to be considered. Super can offer other advantages beyond just tax, like estate planning benefits and protection from creditors.