Jim Chalmers search for more revenue has begun in earnest with superannuation being the first cab off the rank. Whilst politically pitched as being aimed only at 0.5% of the population, with a fixed Total Superannuation Balance (“TSB”) that percentage will only grow, however, is this a broken election promise?
So what’s changing? The government have announced that with effect from the 2025-26 tax year, superannuation funds with a TSB of more than $3m will be subject to an additional tax. This means that on 30 June 2026, the ATO will use the data it collects to raise assessments on individuals who combined TSB are in excess of $3m in total (ie including balances in pension and accumulation and across multiple funds). The assessments will be issued in the 2026-27 tax year with taxpayers being able to pay the additional tax either from their own personal funds or from the superannuation fund itself.
How does it work? The announcement provides that the additional tax will only be applied to the proportion of earnings of the fund in excess of $3m with the balance taxed as normal.
Earnings are not what you would normally expect to be caught. In the proposed form, earnings are calculated to be the change in the value of the fund with an adjustment for withdrawals and net contributions. This means that unrealised increases in value will be subject to tax – yes unrealised, non monetised gains will be taxed and therefore cash will need to be obtained to fund the tax.
Example An example of the new rule in application is as follows:
Carlos is 69 with a TSB of $9m on 30 June 2025, which grows to $10m on 30 June 2026. He draws down $150,000 during the year and makes no contributions.
Carlos’s calculated earnings are $10m – $9m + $150,000 = $1.15m.
The proportion of earnings above $3m is 70% being ($10m – $3m) ÷ $10m meaning that Carlos’s tax liability is 15% × $1.15m × 70% = $120,750.
Now if Carlos’s fund was predominantly a property asset and did not have cash to pay the tax, Carlos would need to fund the funds personally.
Things to Consider Even when taking into account the additional tax on the superannuation balances, the total effective tax rate will not exceed 30% and therefore is preferential to holding a similar asset personally.
The real issue here is the taxation of unrealised gains. If superannuation funds hold property or long standing equity positions that increase in value over time (as you would hope and expect), the increase in value will be taxed, however, there will be no cash to pay the tax unless the asset is sold (subject to excess cash elsewhere). In real terms, where shares are held on market, this position may be able to be managed by selling down a small parcel of the shares, however, for superannuation funds that are weighted towards property, this is problematical as it is difficult to sell a partial interest in a property.
What’s next? The proposed rules will be drafted into law and likely passed given the governments majority. As such, taxpayers with balances in excess of $3m in superannuation should start to examine their options and determine whether they need to re-evaluate the investment profile in superannuation and whether it is preferable to hold the assets outside of superannuation to avoid being taxed on unrealised gains.
Please contact your Engagement Partner if you have any questions about the proposed changes.