Government proposes higher taxes for super balances exceeding $3m

Key Points:

• The government plans to cap tax concessions on certain higher balance super accounts from 1 July 2025.
• The proposed changes will subject earnings on amounts in the accumulation phase above $3 million to tax at the higher rate of 30%.
• Details that haven’t been addressed include how the measure applies to people with multiple super funds, how earnings are determined, the impact on transition to retirement accounts, and interaction with any balance in a retirement phase pension.
• Higher balance clients may need to review their superannuation and estate planning strategies, such as spouse contributions splitting strategies and considering the benefits of a family trust.
• The proposed 30% tax on earnings may still be attractive to high-income earners paying tax at the top marginal rate of 47%.
• It’s important to consider the long-term tax effectiveness and appropriateness of recommended superannuation strategies, particularly given the legislated stage three tax cuts effective from 1 July 2024.

The Australian Government has announced its plans to limit tax concessions on some higher balance super accounts starting from 1 July 2025. If the proposal becomes law, it could have implications for estate and superannuation planning for individuals with high super balances.

Current vs Proposed Taxation of Accumulation Phase

Currently, tax on earnings within the accumulation phase is capped at 15%, and there is no limit on the total amount that a person can hold in accumulation. However, under the proposed changes, earnings on amounts in the accumulation phase above $3 million will be subject to tax at the higher rate of 30%. The proposal will only apply to earnings from the commencement date and will not be applied retrospectively. The measure will not limit the amount that can be held in the accumulation phase.

Details Not Yet Provided

There are still certain details that the government has not provided, including how the measure applies to individuals with multiple super funds, how earnings are determined, the impact on transition to retirement accounts, and interaction with any balance in a retirement phase pension.

Impact on Advice Strategies if Legislated

If the proposal becomes law, there may be a range of advice opportunities for higher-balance clients. They may need to review their superannuation and estate planning strategies, such as spouse contribution splitting or considering the benefits of a family trust.

It is important to note that if a condition of release is not met, it will not be possible to remove amounts in excess of $3 million from super. Additionally, the proposed 30% tax on earnings may still be attractive to high-income earners who are currently paying tax at the top marginal rate of 47% (including Medicare levy).

Considering the Long-term Tax Effectiveness and Appropriateness of Superannuation Strategies

If the proposal is introduced, individuals should carefully consider the long-term tax effectiveness and appropriateness of superannuation strategies recommended, particularly given the legislated stage three tax cuts effective from 1 July 2024.

Government’s Plans to Introduce Legislation Soon

The government has indicated that it intends to introduce legislation shortly to give effect to this change and will consult with the industry on the proposal. More information will be provided as it becomes available.