Our golden superannuation goose to be plucked again…

? Sarah Bowrey and Carl Valentine reflect on the proposed $3M cap to determine and tax "excess balance earnings" in superannuation accounts and pose a number of unanswered questions that require clarification as the detail of this proposal is developed.

Prime Minister Anthony Albanese has announced that the government plans to introduce a new cap for super which would see earnings on super balances above $3 million taxed at 30 percent, rather than the current 15 per cent that applies to all superannuation earnings in the accumulation phase.

The change is set to occur on 1 July 2025, just after the next Federal election.

Prior to this announcement, our Federal Government made some vague statements about considering how one might pluck our golden superannuation goose, grasping a few tail feathers lightly to test the mood of the goose. It would seem there was insufficient hissing from the goose giving our Treasurer and Prime Minister the confidence to give it what some consider to be a fairly well targeted pluck.

What do we know about this proposed change?

Treasury has released limited details and here’s what we understand the new method of plucking our superannuation goose will be from 1 July 2025:

• For this purposes, superannuation earnings will be based on the increase / decrease in an individual’s total superannuation balance, adjusted for the after-tax value of contributions and withdrawals (which will result in earnings for this purpose being comprised investment results along with both realised and unrealised gains and losses).
• Earnings on superannuation balances up to $3M will continue to be taxed at 15% (other than those generated on pension accounts where the tax rate continues to be 0%).
• The proportion of earnings over $3M, referred to as “excess balance earnings”, will then be subject to tax at an additional 15%, bringing the total tax paid to a maximum of 30%.
• The additional 15% tax can be paid by the individual personally or from their superannuation balance.
• The $3M is not an indexed cap (unlike many other caps in our superannuation system) – it will remain at $3M until otherwise changed meaning that in real terms this cap will reduce over the coming years and brings into question the intergenerational fairness of this proposal.
• An individual can still have more than $3M in superannuation, its just how the earnings are taxed that will change.

At this stage no other changes have been announced, however a raft of related consequential changes will need to be made as a result of this proposal.

The proposed taxation of unrealised gains in superannuation accounts, without any corresponding tax offsets for unrealised losses, is of particular concern and runs counter to good taxation practice (unrealised gains should not be subject to taxation in any context). This reflects a more punitive taxation system for some superannuation balances than would exist had those investments been made in another structure (e.g., a company that is only taxed on realised gains at a rate of up to 30%). We see significant issues in what is proposed in this regard and would expect with more time Treasury to come up with a more sensible and equitable calculation methodology.

What are the unanswered questions about this proposed change?

This announcement leaves a large number of unanswered questions. For now we’re not seeking to address all the potential issues or how they will be resolved, but will be keeping an eye on a number of related considerations (and hope that Treasury is too).

• How will this interact with the Division 293 additional contributions tax for high income earners? Does it remain fair that they could be subject to tax on both their contributions and earnings at an additional 15%?
• Currently superannuation balances are categorised between taxed and untaxed elements, made simpler by there only being a 0% or 15% tax rate within superannuation, but will the system now need untaxed, taxed (15%) and taxed (30%) elements to reflect the introduction of a 3rd tax rate?
• What, if any, interaction will there be between the CGT discount (1/3rd) on realised gains in superannuation funds vs an apparent flat 15% tax without discount on unrealised gains?
• Should there be safeguards in place, such as a loss carry back mechanism, where unrealised gains are subject to tax but then superannuation balances are eroded by significant market movements (e.g, as happened post-GFC and during COVID-19) or other losses.
• Will the superannuation guarantee rules be amended to give individuals an option to opt out of compulsory employer super if they already have $3M in super and would prefer to now deal with those funds outside the superannuation environment?
• How often, if at all, will the $3M unindexed cap be revisited and should it be indexed? What will the cost of living be in another 30 years’ time when today’s 40 year olds will be retiring?
• Should the concept of a transfer balance cap (limit on value for pension accounts) be revised or eliminated in light of this new $3M cap?
• How will corresponding changes be made to defined benefit funds to ensure equity across different superannuation arrangements?
• Once the ATO has designed a system capable of calculating this, how long will it take to design and how timely will the reporting be? How long will it take the ATO to issue assessments for the additional 15% tax?
• How will these rules be applied in the case of a death of a member and the consequential considerations around payment of death benefits, timing of assessments and the ability of executors to pay out estate assets with confidence given the individual is assessed?
• Will the taxation of death benefits be amended such that the mix of 15% and 30% taxed balances in the fund are considered?
• Will the young Australians of today want to contribute to superannuation (other than the compulsory superannuation paid on their behalf by employers) if the rules keep changing and the taxes keep increasing?
• Will investment behaviours change given the potentially greater need for liquidity in superannuation funds to pay tax on unrealised gains?

What would we like to see from here

New methods of plucking our golden superannuation goose make us nervous and undermine confidence in the superannuation system broadly. Sure, the statistics suggest this change will impact less than 1% of superannuation accounts (for now….), however this ignores aspirational Australians who are working hard to be fully self-funded in their retirement and need confidence in the system’s long-term integrity.

Our Government now needs to back-up its initial “plucking plan” with details of all the consequential amendments, notwithstanding the implementation date is not until 1 July 2025.

Beyond this, as we’ve said many times before now, we’d love to see genuine and broad based tax reform in Australia – not more of these apparently ad hoc, piece meal changes to specific components of a taxation and superannuation system targeted merely at the perceived wealthy elite. We call on all governments to demonstrate courage and care for Australia to deliver a reformed tax system that will work for all Australians well into the future.

These proposed changes are not yet law and aren’t due to come into effect until July 2025. Take your time to consider the impact of these changes with your advisors and as the full details become clearer, plan accordingly.?