The Federal Government has launched an assault against those with “large” superannuation balances
The Federal Government has launched an assault against those with “large” superannuation balances and has proposed radical changes which will affect super balances over $3 million.
What’s the Story?
From 1 July 2025, the Government will reduce the tax concessions available to individuals whose total superannuation balances exceed $3 million at the end of the financial year. Individuals with balances over this threshold would be subject to an additional tax of 15 per cent on the earnings on any balance that exceeds the $3 million threshold.
30% tax rate
This change broadly brings the headline tax rate (on earnings corresponding to that proportion of the balance greater than $3 million) to 30 per cent.
Individuals will have the choice of either paying the additional 15% tax out-of-pocket or from their superannuation funds.
Unrealised Capital Gains to be taxed
Surprisingly, Treasury has indicated that the calculation of earnings will include unrealised capital gains. That is, assets which have gained in value over the year will be taxable on gains in value even before these assets are sold. This will place enormous pressure on superfunds (especially SMSFs) holding illiquid assets such as real estate, farms etc.
Treasury has indicated that a taxpayer may fund the tax outside the superfund. However, this is cold comfort for those who don’t have enough cash to fund the tax, and undoubtedly will result in untimely liquidations of assets by superfunds or taxpayers. Alternatively, they will be forced into undesired (expensive) additional borrowing to fund tax payments.
Non-Concessionary Contributions Strategy backfires?
Individuals who have undertaken a strategy of maximising non-concessionary contributions could find themselves in a worse position than if they had kept their (after-tax) funds outside super, where capital gain tax is imposed only once an asset is disposed of.
Pension Phase to be taxed?
While it is a little vague, our reading of Treasury’s announcements appears to indicate that the additional 15% tax will apply during the pension phase (whereas currently pension phase attracts xero tax). More clarity is needed here.
Proposed $3 million threshold not indexed
The proposals do not include indexation of the $3 million threshold so it should be expected that, over time, the sufficiency of this amount to provide for a dignified retirement will be much eroded. The Albanese government has admitted that one in 10 retirees will be affected by its superannuation tax increase within 30 years, owing to the decision not to index the proposed $3 million cap.
The government is banking on general acceptance of the proposals given that they will only affect half of one-percent of all superannuation investors. However, as the cap will not be indexed, bracket creep will mean that 10% of all Australians will be affected within one generation. Many of these will definitely not be “rich”.
Credibility of Super system
Treasury does not appear overly concerned that it has impacted the retirement planning of countless ordinary Australians, who are structuring their lives and retirement affairs around long standing rules. This is no doubt going to injure the credibility of the superannuation system as a safe place to park risk capital.
What Does this All Mean?
The proposals are bound to result in a huge hit to confidence in, and credibility of, the superannuation system as a safe place to park risk capital. People in general will wake up to the reality that the rules governing the super system are a movable feast and at the whim of successive (indebted) governments.
The most successful investors in our country (risk takers and business people) will never again trust their savings in the super system and (rationally) will cease contributing after-tax funds to it.
Likewise, younger investors will also be disincentivised from parking their capital in super.
All this will have an impact on the Australian capital markets, and especially on young, high growth and capital hungry Australian businesses which have (up til now) relied highly on capital from the super sector.
Alternatives to super will be sought out by investors and capital users alike.
If you have any questions regarding this article please contact our team at info@polygon.net.au
