Proposed Tax Changes to Superannuation

19.10.23 Retirement By Anthony Hourigan
Proposed Tax Changes to Superannuation

In February of this year, the Federal Government announced proposed changes to taxation of superannuation balances above $3m. As with most proposed legislation changes, there has been concern, confusion, and lots of noise around the matter.

 

Key Points:

The Federal Government proposes to add an additional 15% tax on any earnings that have been generated by the member’s balance above $3m. Fine in theory. The widely criticised component of this is that “earnings” are set to include unrealised capital gains. This is unprecedented. Currently a member will be taxed on income (e.g. dividends, rental income, distributions etc.) and realised capital gains. Under the proposed changes, the tax will apply to the change in a member’s Total Superannuation Balance (TSB), i.e. the uplift in overall value.

 

Example:

 

Member’s TSB is $4m on June 30th, 2025. At June 30th, 2026 the member’s TSB has increased to $4.5m.

The calculated “earnings” for the year are $500,000 (i.e. $4.5m – $4m).

Since the additional 15% tax is applicable only to the portion of the TSB above $3m, this is calculated as follows:

($4.5m – $3m) ÷ $4.5m = 33.3%

Tax Liability = 15% x $500,000 x 33.3%

= $25,000

Provided the member has plenty of liquid assets, then covering the additional $25k in tax is probably not going to be too great an issue. However, what if the member’s balance is heavily concentrated in an illiquid asset, for example the family farm?

 

Asset Valuations & Fluctuations – Tax Refunds?

 

Using the above example, let’s say the reverse happens the following year, i.e. the TSB decreases from $4.5m to $4m. There is no tax refund payable to you. However, this “loss” in TSB can be carried forward to subsequent years.

What is not clear at this point is methodology around valuation of unlisted assets. Up until now, this has been subject to fund auditors, following certain guidelines. Realistically, the price of an unlisted asset is set most accurately when sold. However, the Government would likely want to bring in a uniform approach to unlisted asset classes.

 

Estate Planning

 

What happens when one member passes away, and their super balance passes to their surviving spouse within the SMSF? For example, a husband and wife each has $3m in super, so the new tax doesn’t apply. In 2026, the husband passes away leaving his $3m to his wife. Her TSB has immediately gone to $6m. Now assume that in that year, the assets appreciated 10%, so at the end of the year her TSB is now $6.6m. Under the proposed changes, it would seem she will have a tax liability of:

15% x $600,000 x (($6.6m – $3m) ÷ $6.6m)

= $90,000 x .5454

= $49,090

Estate planning is an area worth closer examination as it relates to the proposals. In this instance, members may consider the value of spreading their TSB to their spouse and their children within super, rather than all to their spouse.

Again, this is currently a proposal so there will be more detail to come.

 

What about Borrowings within Super?

 

Limited Recourse Borrowing Arrangements (LRBAs) are common within SMSFs. They can be particularly useful when purchasing property assets. However, the treatment of LRBAs has its nuances. For example, when you’re under 65 years old, the borrowed amount contributes to net assets, e.g. owning a $3m property with an LRBA of $1.5m = net assets $1.5m. However, once past the age of 65, the LRBA treatment is very different. The LRBA is then added to net assets. So, the same member, upon reaching 65 y.o. now has a TSB of $3m (Net Assets + LRBA).

For the new tax though, the Draft Bill confirms that a member’s share of an LRBA will not be added to their TSB.

 

Conclusion

 

If your balance is over $3m, then it’s worthwhile understanding the nuances of the proposed new tax. If it is passed into legislation, it will affect you from 2025 onwards. However, there is no need to do anything right now since it is currently only a proposal. Chances are you will still be better off holding investment assets within super once the changes come into effect.

 


 

General Advice Warning: Any advice given herein is general in nature and has not taken into consideration your personal financial objectives, situation, or specific needs. You should consider the appropriateness of the advice as it relates to you before acting upon it. Where a specific product has been mentioned, you should always consult the PDS before making any investment decision relating to it.

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