Additional 15% Tax on Superannuation Balances Above $3M – How Will These Proposed Changes Affect Me?

Late last month, there was an announcement proposing a new additional tax on superannuation balances above $3m from 1 July 2025, however the details were yet to be penned.

A fortnight on, the Treasury has released a fact sheet, “Better targeted superannuation concessions” on how these changes will work. It is important to emphasise that these are proposed measures and need to go through the normal parliamentary process prior to being legislated. Therefore, there is no immediate action required by superannuation members now.

So how is the Labor Government proposing to tinker with superannuation I hear you ask? Firstly, let’s start with:

Where are we now – how is superannuation currently taxed?

The tax on earnings within a SMSF depends on whether the members are in accumulation phase or retirement phase:

  • Tax on earnings is 15% in accumulation phase;
  • Tax on earnings is 0% in retirement phase subject to the Transfer Balance Cap (“TBC”) of $1.7m (which will be indexed to $1.9m from 1 July 2023).

Where the meaning of earnings pertains to the taxable income of the fund including investment income such as realised capital gains on investments that have been sold. Please note, for capital gains on investments held for more than 12 months, only 2/3 of the gain is included in earnings to be taxed.

The above tax rates will remain unchanged for superannuation balances less than $3m.

What are they changing and how?

The proposal is for an additional tax of 15% to be applied on the proportion of earnings for superannuation balances above $3m, for each member. Furthermore, a new meaning of “earnings” is being introduced to include unrealised gains and losses, as part of calculating the $3m.

This change in the definition of earnings is a significant one because unrealised gains and losses are not currently taxed.
In other words, even if an investment hasn’t been sold but has increased significantly in value over the years, this unrealised gain will be taxed.

How about a discount on the unrealised capital gains?

Currently, the tax on realised capital gains within superannuation is discounted by one-third if the asset has been owned for more than 12 months, so the effective tax rate is 10% instead of 15%. However, with this new tax, not only is there no discount on the unrealised capital gains and taxed at 15%, but some of the realised gains will also be subject to the additional 15% tax.

What happens if my superannuation balance drops below $3m the next year – do I get a refund?

Unfortunately not. If the valuations of assets drop the following year resulting in negative earnings then these losses are carried forward to offset against future years’ tax liabilities.

This raises more questions especially if an individual’s SMSF is their main source of income for their living expenses. Cashflow planning will be critical if they can only pay the tax by electing to withdraw from their fund and will be challenging if the fund is heavily invested in lumpy assets such as property.

Example of calculation the additional 15% tax

The following example has been extracted from the Treasury fact sheet:

Warren is 52 with $4 million in superannuation at 30 June 2025. He makes no contributions or withdrawals. By 30 June 2026 his balance has grown to $4.5 million. 

This means Warren’s calculated earnings are:  $4.5 million – $4 million = $500,000 

His proportion of earnings corresponding to funds above $3 million is:

($4.5 million – $3 million) / $4.5 million  = 33%

Therefore, this tax liability for 2025-26 is: 15% × $500,000 × 33% = $24,750

Which SMSFs are impacted by these changes and why will valuations become more important than ever

These measures are set to apply to individuals with more than $3m in superannuation, at the end of a financial year.

The $3m cut-off refers to a member’s total superannuation balance (in both accumulation and pension phase) across all their superannuation funds. As these changes are expected to commence in the 2025/26 financial year, then it’s the 30 June 2026 balance that counts.

As SMSFs are required to revalue their assets to market value every 30 June, the valuation of their investments will be even more important than ever. This is particularly so for investments such as property and unlisted investments, where valuations are not readily available at a click of a button. Will there be disagreements between the trustees and independent valuers as to what constitutes market value? What is stopping trustees from “shopping around” for a more favourable valuation? And what is another consequence of all this – the impact on the cost of administration and audit fees.

When is this extra tax payable and by whom?

The extra 15% tax will be levied on the individual personally and they will be permitted to withdraw money out of their superannuation fund to pay for it, just like the Division 293 Tax. If they have multiple superannuation accounts then they have the choice of which fund to pay the tax from.

As for the timing of the payment, given the general SMSF lodgement date for the 30 June 2026 financial year is not until 15 May 2027, it is highly unlikely any payment would be required before 30 June 2027 – realistically, it’s more likely to be during the 2028 financial year.

Is this inequitable? Absolutely, as this new tax has to be paid in advance, while the underlying investments supporting the increased superannuation balances are still growing in value and haven’t been sold! Let’s hope sanity prevails and the planned legislation is discarded.

Conclusion The proposed 15% additional tax on superannuation balances above $3m calculation itself is just the tip of the iceberg. It’s the complexity that lies hidden beneath the water that is the creating the waves of outcry. But alas, it’s too early to be jumping into lifeboats as these changes are still just a proposal.

Author – Anna Wong – Senior SMSF Manager at Premier SMSF SOlutions

*Correct as of 23 March 2023

*Disclaimer – this article has been produced by Kreston Stanley Williamson as a service to its clients and associates. The information contained in the article is of general comment only and is not intended to be advice on any particular matter. Before acting on any areas contained in this article, it is imperative you seek specific advice relating to your particular circumstances. Liability limited by a scheme approved under professional standards legislation.

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