The Federal Government’s proposed increase in tax to 30% on some superannuation income and assets (of March 2023) lapsed because of Senate opposition.
With the election on Saturday, it is timely to remind you of the proposed changes. The changes, if implemented, will reduce the tax effectiveness of superannuation as an investment vehicle for members with higher balances.
Who will be affected by the possible superannuation changes?
Individuals with superannuation member balances over a $3 million threshold will be subject to an additional tax.
What is the rate of additional tax?
15%
What is the basis for this additional tax?
The portion of ‘earnings’ of any balance that exceeds the $3 million threshold.
What are ‘earnings?’
The increase in the member’s account from 30 June in one year to 30 June in the succeeding year, ignoring contributions and withdrawals. This clearly means that unrealised capital gains are taxed.
When does the new tax commence?
To be decided, but expected to be 1 July 2026.
Will the $3m threshold be indexed?
No. Assuming no withdrawals or contributions, a balance of say $2m today, returning an average of 7% p.a. would be subject to the additional tax in just 6 years (see dark green box, below).
Examples based on a range of current balances and rates of return are shown below. The $3m threshold may be closer than you think!
What if investments cause negative ‘earnings?’
They will be carried forward and able to be used to offset the tax in future years. But the government will not repay notional tax on any unused negative earnings.
Who is liable for paying the additional tax?
The liability is with the individual member, not the superannuation fund. Members may have the option to pay the additional tax personally or have the amount released from their superannuation balance.
When is the tax payable?
- Within 84 days of the ATO giving the notice of assessment
- Defined benefit funds may defer the tax for payment until 21 days after a member begins to receive their benefits
Potential Considerations and Challenges:
Liquidity
An individual is assessed for the additional tax, but cannot readily liquidate investments in his/ her fund (because, for example, of having a large exposure to real property) and has no investments outside the fund. The individual is forced to sell what might be a large and valuable property in what might be a poor market to pay what may be a relatively small amount of tax.
Tax on unrealised capital gains
This compounds the example above. Particularly where large exposures to unlisted assets are held, the values of which are not readily ascertainable, and the valuation was not previously completed by a qualified independent valuer. Such assets are more likely to give rise to sizable changes in valuation over time, as recognition of the change usually occurs in jumps which lag actual market conditions.
No tax back if ‘earnings’ fall
If ‘earnings’ fall in a year, the individual does not get a tax refund. But instead can carry-forward the loss. The problem is if ‘earnings’ do not rise enough to recoup tax paid. This is more likely to be of concern once in the drawn down phase, particularly for individuals with higher minimum pension drawing requirements.
Only 84 days to pay
What if an individual has to sell real property to pay the tax? Real property generally has a settlement period of 90 days, on top of the marketing period, etc.
What now?
There is much water to flow over the dam. But it is vital to be prepared.
Depending on the election outcome, you may be potentially affected if you have:
- $2m or more in your superannuation fund (remember that $2m in 6 years is $3m @ 7.5%); and/or
- a large amount of real property or other unlisted assets in your superannuation portfolio
So, be alert but not alarmed, as the introduction and passage of potential new laws will take some time to occur and may have some twists yet to come.
First Samuel will scrutinise the progress of the legislation, and our Private Client Advisers will contact individual clients well ahead of time with advice concerning any structural considerations.
If you are interested in discussing how we can help manage your tax, please contact us.
The information in this article is of a general nature and does not take into consideration your personal objectives, financial situation or needs. Before acting on any of this information, you should consider whether it is appropriate for your personal circumstances and seek personal financial advice.