Superannuation balances of $3 million or more will be targeted with a tax hike under new legislation released for discussion this week.

The measure, which would hit returns on balances of $3 million plus with a 30 per cent tax, was first aired by Treasurer Jim Chalmers in February following speculation that the government would put a cap on super balances above $5 million.

Treasurer Chalmers described the move as a “modest adjustment to apply after the next election that will affect only a handful of people”.

It would be a “change to superannuation tax concessions to make the system fairer and more sustainable”, Chalmers said.

Few will be hit

Chalmers puts the number of Australians affected by the changes at about 80,000, or 0.5 per cent of super accounts, and says it will raise an extra $2 billion or perhaps a little more of revenue.

But shadow treasurer Angus Taylor described the move as  “a broken promise, plain and simple”.

The way the tax will work is relatively simple.

Currently superannuation earnings in accounts in accumulation mode are taxed at 15 cents in the dollar. Given most people are in balanced allocations with a healthy exposure to shares, the effects of dividend imputation mean that the figure is more like [10] per cent in reality.

From July 1, 2025, accounts with $3 million plus will have a new tax impost of 30 per cent. It will only be levied on returns on the portion of the balance above $3 million.

David Knox, director with superannuation group Mercer, says the tax will work as follows.

“If you’ve got $2.1 million in accumulation mode and $1.9 million in pension mode, that’s $4 million. Currently you would be being taxed at the returns on the $2.1 million in accumulation mode at 15 per cent, with no tax on the funds in pension mode,” Knox said.

Under the new system a 30 per cent tax will be levied on returns from the $1 million above the $3 million threshold.

But because super funds in accumulation pay 15 per cent tax on earnings already, the new tax will amount to only another 15 per cent.

“If the $1 million earns 5 per cent, then that [is] $50,000 and 15 per cent of that is $7500 from a $4 million fund,” Knox said.

The controversial bit is how the returns on the $3 million-plus balances will be calculated.

Under current arrangements funds are only taxed on realised gains – that is income from interest and dividends along with profits from asset sales in the tax year.

All gains taxed

However, the 30 per cent tax to be levied on $3 million balances will be worked out by the ATO measuring account values at the start and end of the year and counting it all as income.

That means it will catch rises in asset values that have not been realised with a sale. It has got the Opposition upset.

“It taxes unrealised capital gains, meaning retirees and superannuants will face tax bills on money they haven’t even earned yet – this will hit small business owners, farming families and self-managed super funds [SMSFs] the hardest,” Taylor said.

Small businesses, farming families and SMSFs could be hit because they often put lumpy [long-term] assets like business or investment property in their super funds.

The Opposition and critics of the new tax say those funds won’t have the cash to pay the tax bill.

However, Knox said: “Super funds should have a range of assets – you shouldn’t put all your super fund in a property.

“You want a well-designed investment policy that has some cash, so I think in most cases there should be enough cash to pay the appropriate tax.”

Those with large super funds worth more than $3 million would generally have assets outside super that could be used to pay the tax, Knox said.

All taxpayers will be able to use assets both inside and outside their funds to pay the tax bill.

The $3 million threshold will not be indexed, with the government arguing that income tax thresholds are not indexed but are increased from time to time, and super should be no different.

Still tax advantages

Knox said Mercer “supports the move as there will remain significant tax concession for those with large super balances”.

The change would make the system fairer and more sustainable without damaging the effectiveness of super as a savings tool, Knox said.

With the Coalition opposing the measure, the government will rely on the crossbench to pass the legislation.

The Greens have said they will vote for the changes if the government also implements superannuation payments on paid parental leave.

With government modelling showing the new tax will generate $2 billion in extra revenues in its first year, that should be doable.

Paying super on paid parental leave would cost the government less than 10 per cent of that, an estimated $200 million annually, according to the Association of Superannuation Funds of Australia (ASFA).

So the Greens will have leverage with the government on delivering super on paid parental leave.

The New Daily is owned by Industry Super Holdings