The Australian Government had proposed to introduce significant changes to superannuation rules, particularly targeting high-balance accounts. The proposed changes were around creating a $3 million limit on the current superannuation rules with a higher tax rate on funds over this limit.
The proposed bill was not passed last week however the door is still open. Below we have provided a recap of the proposed changes.
Overview of the Changes
Starting from 1 July 2025, the government was proposing to implement a new tax regime for superannuation balances exceeding $3 million. This change aims to ensure that tax concessions are better targeted and more equitable.
Key Points of the New Rules
1. Additional Tax on Earnings:
- An additional 15% tax will be applied to earnings on superannuation balances over $3 million
- This tax, known as Division 296 tax, will be calculated based on the movement between the member’s opening and closing total balances for the year, adjusted for withdrawals and contributions.
2. Calculation Method
- The tax liability is determined by calculating the earnings for the year and then applying the 15% tax to the proportion of earnings attributable to balances above $3 million. This then makes the superfund total tax at 30% which is comparable with an Investment company tax rate.
- This method ensures that the additional tax is only levied on the portion of the balance exceeding $3 million.
3. Impact on Members:
- Individuals with a total superannuation balance (TSB) across all accounts exceeding $3 million will be affected.
- Couples can have up to $6 million in superannuation without being impacted, provided no single member’s balance exceeds $3 million
4. Defined Benefit Interests:
- Specific rules will apply to defined benefit interests, detailing how the tax is calculated and payable.
5. Practical Considerations:
- The tax will be levied on the individual member, not the superannuation fund.
- Members can choose to pay the tax personally or withdraw it from their superannuation fund.
Concerns and Considerations
- Unrealised Gains: The tax will also apply to unrealised gains, potentially causing cash flow issues as members may need to fund the tax on assets that have not yet realised their value.
- Negative Earnings: Losses in one financial year can be carried forward to offset future earnings, but there is no mechanism to carry back losses.
- Non-Indexed Threshold: The $3 million threshold is not indexed, meaning it will not automatically adjust for inflation.
Strategic Planning
At Boutique we have been working with clients to get ready for these changes which we expect to get through albeit with hopefully compromised terms. There is no one right answer and depends on the family circumstances, position of assets outside super, alternate investment structures and the exploration of the family’s legacy and estate planning opportunities.
Recent Developments: Failure of the Bill to Pass
Last week, the bill proposing these changes failed to pass in the Senate. Despite having significant support, the bill did not secure the necessary votes to move forward. This outcome has left many stakeholders in a state of uncertainty, as the proposed changes were expected to bring about substantial reforms in the superannuation landscape.
Implications of the Bill’s Failure
1. Continued Uncertainty:
- The failure to pass the bill means that the current superannuation rules remain in place, leaving high-balance account holders in a state of limbo regarding future tax liabilities.
2. Political and Economic Impact:
- The inability to pass the bill highlights the political challenges in implementing significant tax reforms. It also underscores the ongoing debate about the fairness and effectiveness of superannuation tax concessions.
3. Future Prospects:
- While the bill’s failure is a setback, it is likely that the government will revisit the issue, potentially introducing revised legislation in the future. Stakeholders should stay informed about any new developments and be prepared for possible changes.
A Boutique we feel this bill failure has allowed more time to discuss and formulate a sensible compromise. The major parties can hopefully negotiate a more balanced approach.
For more detailed information, you can refer to the Australian Taxation Office’s official updates. For advice contact the team at Boutique Advisers.