You’ve probably heard there are going to be changes to our super system. The federal government has proposed a cap on tax concessions, which means Australians with high super balances will be paying more tax, likely to impact about 80,000 Australians, for now.
So what exactly are the changes and what do they mean for you?
It’s all about the tax you pay on investment earnings. Let’s break it down.
Currently, when you’re still working and adding money to super (called the accumulation phase) the earnings from your super investments are taxed at 15 per cent.
As part of the proposed changes, the tax rate on earnings will double to 30 per cent for super balances above $3 million.
You will still pay a 15 per cent tax rate on earnings on retirement savings up to $3 million but will have to pay the higher tax rate on the remainder.
I’m retired. Will it affect me?
That’s because of another part of super, called the transfer balance cap. This is the amount of money you can transfer into a tax-free account when you reach retirement age.
It was introduced by the Turnbull government to limit tax-free super balances and was originally set at $1.6 million.
If your super balance is under the transfer balance cap, which is currently $1.7 million (increasing to $1.9 million on 1st July 2023) the proposed change won’t impact you.
Retirees with much higher balances will have a more complicated system.
The Government is proposing a three-tiered super tax rate. Effectively, you pay zero per cent tax on anything you put into the retirement phase, up to the $1.7 million transfer balance cap. Then you’ve got money you can keep in the accumulation phase, being taxed at 15 per cent. Then once you hit the $3 million mark it’s taxed at 30 per cent.
|A three-tiered system for earnings
|Up to $1.7 million into the retirement phase
|Up to $1.3 million remaining in the accumulation phase (to a total fund balance of $3m)
|Over $3 million in the accumulation phase
We have two key concerns with the proposal.
The first is that the earnings that will be taxed at an additional 15 per cent will be calculated based on the notional or unrealised value of your member balance. That is, if the value of your super fund increases during a financial year, you will be taxed on the increase in the value, whether it is realised via the sale of assets or not.
This sort of taxation does not apply in any other part of the taxation system, hence we do not believe it is likely to be passed in its current form on this basis.
Similarly, the $3 million cap will not be indexed, hence a significantly higher number of people will likely be impacted by it in the future as balances continue to grow and inflation reduces the value of capital.
What happens next?
Despite the proposed changes, superannuation will remain by far the most tax-effective entity structure through which to hold your retirement assets.
As the proposal works its way through the legislative process, however, and the picture becomes more certain, alternative options to maximise tax efficiency will become clearer.
At this stage, and until the amendments are made clear in their ultimate form, the important thing for retirees who may be affected is to remain calm and refrain from making any drastic financial changes. As ever, with superannuation, the devil will be in the detail.
The changes are likely to come into effect from the middle of 2025.
Jason Kirk (CFP® Professional, SMSF Specialist Adviser, GradDip. App.Fin&Inv, B.Econ) is a representative of Alman Partners Pty Ltd, Australian Financial Services Licence No: 222107.
Any information provided to you was purely factual in nature. It has not been taken into account your personal objectives, situation or needs. The information is objectively ascertainable and is not intended to imply any recommendation or opinion about a financial product. This does not constitute financial product advice under the Corporations Act 2001 (Cth). It is recommended that you obtain financial product advice before making any decision on a financial product such as a decision to purchase or invest in a financial product. Please contact us if you would like to obtain financial product advice.