Further Detail: Cap on Superannuation Tax Concessions

02 March 2023

Following our newsletter from last week, on 28 February 2023 the Prime Minister and Treasurer announced their plans for a cap on superannuation balances that would be eligible for concessional tax treatment.  This cap is $3 million.  For benefits in superannuation greater than $3 million, an additional 15% tax will apply to earnings on assets above that amount. It is expected that this change will impact approximately 80,000 Australians, or 0.5% of the population with a superannuation account

Key Items

The announcement was very high level, with headline items as follows:

1. The cap would not be indexed.
2. The cap would apply from 1 July 2025 to future earnings, and therefore would not be retrospective.
3. This timeframe is after the next election, so people can vote accordingly, although legislation will be introduced and could be passed before the election.
4.  It doesn’t alter the level of money that people can accumulate in superannuation overall, but rather the tax concession that applies to the earnings.
5. All other rules with respect to superannuation will remain the same including:.
   • Contribution rules
   • Preservation and access to benefits
   • Tax treatment of contributions
   • Tax treatment of benefit payments

As per the media storm last week, such an announcement was expected, with much speculation about the limit (would it be $3 million or $5 million), and also what the tax rate may be.  It was expected that any announcement would not force money out of superannuation where the limit was exceeded, but would reduce the tax concessions available.

Further Detail

Further details were released yesterday in a 1 March 2023 Treasury paper, with the following areas to note:

1. 15% tax would apply to the earnings where the total superannuation balance (TSB) at the end of a financial year is over $3M.
2. The tax would be in addition to the tax position on the amount under the $3M:
   • if the amount under the $3M is all in pension phase, then you would still receive the pension 0% tax rate on that proportion of the earnings, with the proportion of the earnings that relates to the over $3M threshold being taxed at 15%;
   • if the amount under the $3M is all in accumulation, then the earnings amount below the $3M would be taxed at 15%, and the amount above would be taxed at an additional 15%.
3. The amount of any earnings within the member account for the year would be a reference to the difference between the total superannuation balance (TSB) at the end of a financial year and the beginning of the financial year, with adjustments for contributions (net of tax) and withdrawals.
4. The proportion of earnings that would then be subject to the additional tax is based on the TSB at the end of the current year, less the $3M threshold, divided by the TSB of the current year.
5. Accordingly, unrealised capital gains will be included in any calculation, as the TSB refers to market values.
6. If an individual makes an earnings loss in a year (including an unrealised loss), it can be carried forward to a future year.
7. The first test time will be 30 June 2026, and the first notices of assessment will be issued during the 2026/2027 financial year once super fund’s have reported the relevant balances (this could be as far out as May / June 2027 in terms of the lodgement due dates for SMSFs).
8. Individual’s can choose whether to pay the additional tax personally, or the super fund pays it.

Examples (from the Treasury Paper):

Calculation of Earnings:

Carlos is 69 and retired. His SMSF has a superannuation balance of $9 million on 30 June 2025, which grows to $10 million on 30 June 2026. He draws down $150,000 during the year and makes no additional contributions to the fund.

This means Carlos’s calculated earnings are:

• $10 million – $9 million + $150,000 = $1.15 million

His proportion of earnings corresponding to funds above $3 million is:

• ($10 million – $3 million) ÷ $10 million = 70%

Therefore, his additional tax liability for 2025-26 is:

• 15% × $1.15 million × 70% = $120,750

Carry forward of earnings loss:

Dave is 70 and has two APRA-regulated funds and one SMSF. At 30 June 2025, his TSB across all funds was $7 million. During 2025-26, he withdraws $400,000 from his SMSF and makes no contributions. At 30 June 2026, his TSB across all funds is $6 million.

This means Dave’s calculated earnings are:

• $6 million – $7 million + $400,000 = – $600,000

His proportion of earnings corresponding to funds above $3 million is:

• ($6 million – $3 million) ÷ $6 million = 50%

The earnings loss attributable to the excess balance is $300,000. Dave can carry forward the $300,000 to offset future excess balance earnings.

At 30 June 2027, Dave’s funds make earnings on his excess superannuation balance of $650,000. He carries forward the earnings losses attributable to his excess balance at 30 June 2026 of $300,000 and is only liable to pay the tax on $350,000 of earnings.

This means his tax liability for 2026-27 is:15% × $350,000 = $52,000

Preliminary Musings

Although the detail will only be evident once the draft legislation has been released, we provide the below preliminary comments:

1. Not indexing the cap is likely to be highly criticised, as it will not keep pace with inflation and general increases in value, and therefore ultimately be unfair (and not align with the objective of superannuation).
2. The way the formula works is that there can be the situation where the effective tax rate on the earnings above $3M is not 15%, but a lot lower, depending upon the extent to which the member accounts are over the $3M threshold.
3. There is no comment with respect to the impact of the individual paying the tax rather than the fund – it would then add to the TSB in the following year, so could exacerbate any excess in the following year.
4. The payment of the tax itself may well be 12 months and beyond from the end of the financial year, depending on the timing of the issue of the notices.
5. From the examples, there doesn’t seem to be a proportionate concession when applying previous proportionate losses. This is generally a complex area in applying carry forward losses, so no doubt Treasury wanted to simplify any initial draft.
6. The proposed additional tax is to be calculated on the growth of the members account and not on realised income and gains. This is a major deviation in terms of current fiscal policy and tax law.
7. Given the earnings component is based on differences in value, and not on realised earnings there could be some cashflow implications where assets are illiquid, and a tax liability needs to be paid. 
8. As the additional tax is based on paper gains, if an investment is highly valued in one year and then becomes worthless, there may be tax payable upfront where no actual gain is realised in the future, which doesn’t align with the fairness principal in the proposed objectives of superannuation.
9. There could be situations from a death benefits perspective when the tax position is prohibitive, and also where realised capital gains are subject to double taxation. 
10. Individual’s may be disincentivised to make extra contributions to superannuation, as they no longer benefit from the tax concessions that encourage the accumulation of superannuation above a certain limit.  If they have the option of investing within superannuation or outside, under the current rules superannuation can be compelling as there is concessional treatment on any realised capital gain on the sale of an asset, with the trade-off being unable to access the proceeds net of tax for lifestyle spending. If those concessions are not available, then people may prefer to invest entirely outside of superannuation as they would likely be paying similar to the corporate tax rate, and would be able to access the funds from the sale of a capital growth asset at any time and not be subject to preservation or access restrictions (albeit with some additional tax implications if they want to spend the money for personal lifestyle outgoings).
11. The operation of the limit may give rise to some valuation arbitrage, particularly in light of the benchmark being the TSB at 30 June of each year, (i.e. a comparison of a higher TSB at 30 June 2025 for comparative purposes for the following year).
12. The operation of the limit may motivate some members who are eligible to withdraw money out of superannuation in the lead up to a 30 June so as to remain under the threshold to mitigate the additional tax.  Where the $3M TSB threshold is not exceeded, then the additional tax won’t apply.  In saying that, if the individual is not far over, then the proportionate additional tax payable is not that prohibitive given the formula. 

Given the statistics that this announcement would only impact 0.5% of the population, it is expected that it won’t sway any election results (in contrast to Labor’s previous franking credit removal debacle).

Next Steps

We await any draft legislation with no doubt substantial consultation amongst the industry bodies, before we can provide further guidance on any restructuring requirements.  As noted above, the devil will be in the detail in the legislation, as to the precise intricacies and operations of the proposal contained in the consultation paper.

In the meantime, there no need for immediate action, and continue as normal with respect to your superannuation.  Where you are looking to invest in a more substantial asset within superannuation, it may be appropriate to give us a call to discuss the implications and considerations, particularly where you are below age 55 to 60, and the expectation is that the proposed investment will generate a reasonable return that may push you over or close to the limit.  As always, if you want to discuss further, or have any other general superannuation questions, please reach out to any member of our super team.

CONTACT OUR SUPERANNUATION TEAM:

This newsletter is current as of 02 March 2023, however, please note that announcements and changes are being made by the Government and the ATO regularly, and we expect that the tax and business-related responses will continue to evolve.  Before acting upon the content of this newsletter, please contact us to discuss how the above applies to your specific circumstances.

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