Media attention has revved up about the new 15 per cent tax on super, which brings tax on earnings for those with balances of more than $3 million to 30 per cent. With Labor having an overwhelming majority in the House and only needing to negotiate with the Greens in the Senate, the tax is likely to pass.
No one likes a new tax, but super remains very concessional, and those with balances exceeding $3 million are way ahead. Your comfortable retirement is safe, and you are still getting the benefit of tax concessions.
The aim of superannuation is to preserve savings for a dignified retirement, alongside government support, in an equitable and sustainable way.
The Association of Super Funds of Australia (ASFA) sets annual income for a comfortable retirement for homeowners at $73,077 for couples and $51,805 for singles. Couples need savings of $690,000 and singles, $595,000. Just one-fifth of $3 million will get you there. Everything above that is upside for kitchen renovations, gifts to the kids, a new car or a cruise.
Moderate wage earners or those doing unpaid care work – mostly women – never get near $3 million. They rely on the age pension, currently a maximum of $29,754.40 for singles or $44,855.20 for couples annually.
On a professor’s salary with 17 per cent contributions in high-growth assets, I am well below the $3 million threshold, and I anticipate a comfortable retirement.
How does the super tax work?
The excess super balance tax applies to fund members (in addition to the 15 per cent tax on earnings in the fund). You first work out your super earnings: the difference between the account closing balance at the end of the financial year and its opening balance for that year, adding back withdrawals, and deducting contributions. (If you have more than one fund, add them all together).
Assume an account closing balance of $4.5 million and an opening balance of $4.2 million, no withdrawals and employer contributions of, say, $25,000 (assume it’s net of the 15 per cent tax on contributions). Earnings would be $275,000 for the year.
But the tax applies only to earnings relating to the share of your balance that exceeds $3 million. In this example, that share is 33.33 per cent (4.5 million minus the $3 million threshold, divided by 4.5 million). So, the taxable super balance is 33.33 per cent of $275,000, or $91,657.50. The tax payable would be $13,748.
The tiny cohort with balances in the tens of millions pay more tax because they have a greater excess over $3 million – but they still only pay 15 per cent on annual earnings relating to that excess balance.
Why you shouldn’t worry about an unrealised gains tax
Because it applies to the difference between closing and opening fund balances, the tax applies to “unrealised” or accrued gains on assets – such as shares or real property – held by your fund. This has generated a lot of angst.
But there are good arguments for taxing these unrealised gains. They are real additions to wealth in the fund. For example, a super death benefit would be calculated based on this balance.
Everyone is used to taxing unrealised gains in the form of land tax and council rates. While it’s novel in the superannuation context, the principle is the same.
And all super funds – including SMSFs – are already required to value their fund balance each year – this includes valuing their assets.
What if fund earnings were negative because unrealised asset values went down? This is a genuine concern in this era of global uncertainty.
If you have zero or negative earnings during a year, the excess super balance tax does not apply even if your balance exceeds $3 million. Negative earnings carry forward to offset earnings and reduce the tax in future years.
What about cash to pay the tax? It is imposed on fund members but you can ask your fund to pay the tax from your account balance. Most funds will have no difficulty with this.
Funds that are cash-constrained – for example, some SMSFs that hold real property, risky assets such as art, or an interest in an active business – may face difficulties. The fund member will usually have access to other assets to pay the tax. If there are genuine difficulties, the Tax Office should respond appropriately with a payment plan.
Should we index the threshold?
There is room for debate about the threshold – and whether we should index it. A threshold set at five times the balance for a comfortable retirement seems reasonable. The Greens have suggested a $2 million indexed threshold; others might suggest $10 million.
From the perspective of overall superannuation policy – there is a good argument for not indexing the threshold. Over time, this will refocus superannuation on its true purpose: sustainable support for retirement saving. It will be decades before the $3 million threshold causes concern about adequate saving – a future Parliament could act if that happened.
Let’s relax and pass the super tax. It’s reasonably fair, affordable, will raise revenue and it makes super more sustainable.
Then let’s move on to tax reforms that Australia needs to support productivity, fairness and revenue. We need to make sure that workers and active businesses do not face tax rates that are too high, that all investments (including trusts) are fairly taxed, that the GST is robust and raises enough revenue, and that our tax system aligns with climate goals. I look forward to the debate.
First published at the Australian Financial Review on Tuesday 27 May 2025.
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