From 1 July 2025, the Australian government has proposed a reduction in tax concessions for individuals with total superannuation balances (TSB) exceeding $3 million. This brief discusses the implications of taxing unrealised gains, the potential impact on individuals participating in substantial defined benefit schemes, and the Treasury’s potential need to take these schemes into account when implementing the proposed measures.
Overview
The proposed changes would impose an additional 15% tax on earnings for individuals with Total Superannuation Balance exceeding $3 million, bringing the top tax rate on earnings corresponding to the portion of the balance exceeding $3 million to 30%. According to the Treasury fact leaflet, less than 0.5% of individuals with a superannuation account will be affected by this measure, which will take effect in the 2025-26 financial year.
- The difference between the individual’s total superannuation balance (TSB) at the beginning and end of the financial year, less withdrawals and contributions, will be used to determine earnings.
- Negative income will be able to be transferred forwards to reduce future tax obligations.
- Individuals will have the option of paying the levy themselves or through their retirement accounts.
- Individuals with multiple funds will be able to choose which fund the tax is deducted from.
- The tax will be distinct from the individual’s income tax obligations.
- Total Superannuation Balances in excess of $3 million will be tested for the first time on 30 June 2026, with the first tax liability notices anticipated to be issued to individuals in the 2026–2027 fiscal year.
- The ATO will notify individuals of their obligation to pay this tax.
The Taxation of Unrealised Gains
The proposed method involves the taxation of unrealised gains and losses, similar to the way in which superannuation funds calculate members’ interests currently. This may result in individuals with substantial superannuation balances paying tax on unrealised paper gains, posing potential cash flow and equity issues.
Taxing unrealised gains could also discourage long-term investments in growth assets, which would have an impact on retirement income and economic growth as a whole.
Problems with Taxation of Unrealized Gains
Taxing unrealised gains could result in the taxation of assets that have not yet been sold, causing potential cash flow problems for individuals who must pay the additional tax. Additionally, unrealised gains do not accurately reflect an individual’s tax-paying capacity. This could lead to individuals being taxed on gains that may not be realised or that may be mitigated by future losses.
Effect on Investment Method
Individuals with total superannuation balance exceeding $3 million may be incentivised to modify their investment strategies, potentially shifting from growth assets to income-generating assets in order to satisfy their tax obligations as a result of the proposed changes. As individuals reduce their investment in growth assets, this shift could have repercussions for retirement income and broader economic growth.
Equity Issues
Individuals may be subject to taxation based on the fluctuating value of their investments, as opposed to their actual earned income, if unrealised gains are taxed. This could have a disproportionate impact on individuals with sizable superannuation balances whose investments may experience significant price fluctuations.
Implications for individuals participating in Defined Benefit Plans
Many government bureaucrats (including legislators) who participate in generous defined benefit schemes could be significantly affected by the proposed changes. If the present value of these individuals’ defined benefit plans exceeds $3 million, they may also be subject to the additional tax on earnings. This may result in heightened scrutiny and demands for reform of the generous defined benefit plans these individuals receive.
Incorporating defined benefit plans into the scope of the proposed measures could pose difficulties in accurately calculating the present value of member benefits and the applicable tax liability. The unique characteristics of defined benefit plans may necessitate the development of customised rules and calculations to ensure that affected individuals are treated fairly.
Example of the Calculation in Practice
Consider Jane, who in the 2025-26 financial year has a total superannuation balance (TSB) of $3.5 million. According to the proposed adjustments, Jane will be subject to an additional 15% tax on earnings that exceed $3 million. Here is an outline of how the additional tax would be computed:
Determine the portion of Jane’s total superannuation balance that exceeds $3 million: $3.5 million – $3 million (the threshold) = $500,000 (excess balance)
Calculate the interest earned on the excess balance: Assume Jane’s investments yield a 7 per cent return in the fiscal year 2025-26. $500,000 (excess balance) multiplied by 7% (annual return) equals $35,000 (earnings on excess balance)
Apply the additional 15% tax on the excess balance’s earnings: Earnings on an excess balance of $35,000 multiplied by an additional tax rate of 15% equals $5,250. (additional tax)
Jane would be required to pay an additional tax of $5,250 on the proceeds from her excess balance for the 2025-26 income year, based on this example. This additional tax is in addition to the standard 15% tax on earnings from the remainder of her total superannuation balance. Note that, for simplicity, the example implies Jane has no unrealised gains or losses, for which the tax treatment would need to be evaluated separately under the proposed changes.
Navigating the Proposed Changes
The following general suggestions may assist individuals with affected superannuation accounts in preparing for the proposed changes:
• Evaluate your investment strategy: Evaluate your current investment strategy to determine if it correlates with your retirement goals, taking into account the proposed modifications. In light of the potential impact of the additional tax on unrealised gains, assessing the balance between various types of assets may be beneficial.
• Consider diversification: Diversification has the potential to reduce the portfolio’s volatility and mitigate the tax impact of unrealised gains. Exploring a variety of asset classes, industries, and regions may serve to mitigate risk.
• Keep track of your total superannuation balance: Regularly examining your TSB will keep you informed of its value and ensure you are aware of any potential tax implications as it approaches or surpasses $3 million.
• Consult with professionals: A qualified financial planner, tax advisor, or wealth manager can assist you in navigating the complexities of the proposed changes and developing a customised plan to address the potential impact on your retirement resources.
• Stay current: Keep abreast of the development of the proposed changes as well as any additional amendments or clarifications issued by the government. Maintaining awareness will assist you in making timely decisions and adjusting your planning strategies accordingly.
• Investigate alternative retirement savings options: If your TSB exceeds $3 million, you may wish to investigate alternative retirement savings options in order to diversify your retirement income sources and potentially reduce the impact of the additional tax on your superannuation earnings.
Always consult a professional financial advisor to ensure that the strategies employed are appropriate for your individual circumstances and financial objectives before implementing them.
Bundling it All Up
Individuals subject to the additional tax and those participating in generous defined benefit schemes may be affected by the proposed changes aimed at large superannuation balances proposed by the Australian government. In order to ensure that these individuals are treated fairly, it may be necessary to conduct additional consultations and develop rules that take into account the specific character of defined benefit plans.
Before making any decisions concerning your superannuation, you should always consult a tax and financial planning expert.
