Treasurer Dr Jim Chalmers unveiled the proposed Better Targeted Super Concessions as a new tax on super in February 2023, and then confirmed the proposal in the May Federal Budget. In October, we received draft legislation which appears to have ignored all industry consultation. The changes are set to take effect from 1 July 2025. The new tax will be called a Division 296 tax and will apply an additional 15% tax on earnings on super balances above $3M. However as always, the devil is in the detail, and this is in fact a tax on unrealised capital gains.
If you have more than $3M in Super on 1 July 2025, the ATO will apply a formula that compares your starting and ending balance over the financial year, reduced by contributions and increased by withdrawals in that year. The formula takes the calculated earnings multiplied by the proportion that you are over $3M, and taxes what is in effect an unrealised gain, at 15%.
Here is a worked example based on a real client – let’s call him Bob and his actual position.
| Total Super Balance (30 June) |
$6,985,000 |
| Less: Total Super Balance (1 July) |
$5,170,000 |
| Plus: Withdrawals |
$42,500 |
| Less: contributions |
$27,500 |
| Change in Total Super Balance |
$1,830,000 |
| Proportion of Super Balance Exceeding cap: |
|
| Total Super Balance (end of year) |
$6,985,000 |
| Less: Proposed Cap |
$3,000,000 |
| Divided by Total Super Balance |
$6,985,000 |
| Proportion of earnings |
57% |
| Tax Liability |
|
| Change in Total Super Balance |
$1,830,000 |
| Times Proportion of earnings |
57% |
| Times tax rate |
15% |
| Estimated Tax Liability |
$156,465 |
The tax liability for the Division 296 tax is therefore $1,830,000 X 57% * 15% = $156,465. This creates an additional $156,465 in tax on top of the usual income tax paid within the super fund.
The above numbers are based on the 2021 year which had excellent returns in both property values and shares. This year would have caused an additional $157,000 in tax.
However, if Bob subsequently sells the property and shares, and realises an actual capital gain, he will receive no “credit” for the tax already paid on the unrealised gains in the 2021 year. Under the draft legislation Bob would pay tax on the unrealised gain and then may also pay tax on the realised gain should he sell the assets.
Adelaide Business School chair of finance and business analytics, Professor Ralf Zurbrugg recently said “Taxing unrealised capital gains is a somewhat radical departure from existing tax policy and extremely rare in OECD pension systems,” and I couldn’t agree more.
The Government believes that around 80,000 people, or approximately 0.5% of Australians with a super account in the 2025–26 income year, are expected to be impacted. According to the budget, the measure is estimated to increase receipts by $950 million and increase payments by $47.6 million over five years from 2022–23. In 2027–28, the first full year of receipts collection, the measure is expected to increase receipts by $2.3 billion. This is supposed to make Australia’s super system “more sustainable and fairer through a modest change to ensure generous superannuation tax breaks are better targeted.”
The problem is twofold.
- Clients make decisions to lock money away into super based on the rules of the day. They are making long term planning decisions. When Government continually changes the rules on superannuation, it decreases confidence in the superannuation system.
- The $3M Cap is not being indexed (based on current draft legislation and Government commentary to date). This will mean more and more people will be caught under these rules in the future and it also adds an additional defacto death tax. For example, Jim and Julie are retired and each have $2.5M in super which has been built up by being early and consistent contributors to super over many years. If Jim passes away, leaving his Super to Julie as a reversionary pension, she will now have a $5M Total Super Balance and would be caught under the new rules.
In summary the rules will work as follows:
- It is a new tax called Division 296 where an additional 15% Tax is applied to earnings above $3M (per person) (reducing the existing tax concessions).
- Due to commence from 1 July 2025.
- At DRAFT Legislation stage.
- The tax can be paid personally or released from super (even if not retired).
- The tax is based on the change in total super balance (not the actual earnings) and is therefore a tax on unrealised gains.
- The balance of a Limited Recourse Borrowing Arrangement (LRBA) is not included (the Total Super Balance is at a gross level not net).
- There is no indexation of the $3M.
- Negative calculated earnings may carry forward to offset in the future.
- Existing capital gains tax concessions are not impacted (on realised gains).
- Division 296 tax is imposed separately to personal income tax and cannot be reduced by personal deductions, offsets or losses.
- Importantly it does NOT limit the total amount you can hold in super!
The number one question I am being asked is “should I reduce my member balance under $3M before 1 July 2025? The answer is you should do nothing until we have final legislation. Then if the legislation is enacted as drafted it will depend on a range of issues including:
- Your age and objectives
- Your current family situation
- Your estate planning objectives and concerns
- The assets in your Super Fund (are they high growth or illiquid?)
- Whether or not you already have large unrealised gains in your fund which you are considering realising.
The SMSF Association of Australia is lobbying hard on behalf of members and SMSF Trustees. The SMSF Association is working to ensure that politicians fully understand the impact of the legislation and the Association is also proposing alternative solutions that would provide tax revenue for the Government in a fairer manner.
Finally, taxing unrealised gains is not a precedent that we want to see. What’s next – tax on the unrealised gains on your investment property or worse, on your own home? If this proposed tax is likely to impact you, please talk to your local Federal Member of Parliament.
If you would like to discuss the impact of the draft Better Targeted Super Concessions, please contact one of our expert Wealth Advisors in our Ulton Wealth Management team today.
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