I promise this will be my last blog on the proposed changes to superannuation – at least until there is something more concrete to discuss.
My last blog A fast-moving couple of weeks finished off with the announcement the government intends to double the rate of tax paid on the earnings of superannuation funds that have a member balance exceeding $3m.
Initially, this initiative was accepted - I am not going so far as using the word “welcomed” - partly on the basis that it would only affect a handful of Australians that have had the good fortune to have accumulated a significant balance in superannuation.
And, given the limit applies to each member of a fund, a couple could effectively have retirement savings of $6m between them without having to pay any additional tax.
I think it’s fair to suggest that having a retirement nest egg with $3m will be more than adequate for most people to enjoy a very comfortable retirement lifestyle.
However, as mentioned at the close of my last blog, “the devil will be in the detail”.
While the Leader of the Opposition was very quick to condemn the proposal and announce they would repeal it if re-elected, Treasury has now released more details of Labor’s proposed plan to double the tax on superannuation fund earnings for those people with member balances that exceed $3m.
Before getting into the details, it is important to stress this proposed change is to take effect from 1 July 2025. This is after the next Federal election is due to be held. Notwithstanding a double dissolution of the parliament, the next election is not expected to be held until late 2024, or in the first half of 2025.
Therefore, a change of government could well see the proposed change destined for the bin. Only time will tell.
Currently, superannuation fund earnings, other than earnings derived from assets supporting pension payments, are taxable to the superannuation fund. Earnings include dividends, rent, interest, and capital gains that arise from the sale of assets.
The current tax rate applying to income is 15%, while capital gains on the sale of assets that have been held by a superannuation fund for more than 12 months receive a 33.33% discount, meaning they are effectively taxed at 10%.
Under the proposed changes announced by the government, tax on earnings for members with an account balance that exceeds $3m will be subject to an additional 15% tax.
However, it is not a case of simply increasing the current tax rate to 30% on the affected earnings.
The proposed changes include:
1. Where a member’s balance exceeds $3m, any additional tax payable will be levied personally on the member, rather than on their superannuation fund.
However, when additional tax becomes payable, the member will have the option of having it released from their superannuation.
2. Commentary around additional tax being paid on earnings of the superannuation fund is a misnomer.
Where a member has a “total superannuation balance” of more than $3m, the “earnings” on which the additional 15% tax is payable is based on a portion of the increase in a member’s total superannuation balance over a twelve-month period, after adding back any withdrawals and deducting the net value of contributions.
In other words, a member’s account that increases because of unrealised capital gains will have some of those unrealised gains taxed. It is the movement in the member’s account balance that is being taxed, which is not necessarily the same as their earnings.
3. While the government has previously stated that only a small proportion of superannuation fund members (less than 80,000 people) will be affected by this measure, it appears the $3m cap is not going to be indexed to consider inflation.
This means that over time, more and more Australians will be caught in the net and will have to pay additional taxes. Even younger people earning a reasonable salary are likely to find their account balance will exceed $3m by the time they retire.
Where to from here?
This recent announcement is merely a proposal. The government has announced it will consult before any legislation is drafted.
It is not a fait accompli.
This proposal has a long way to go, and many hurdles to pass before it becomes law.
In the words of former Prime Minister, John Howard “be alert but not alarmed”.