Treasury has released (31 March 2023) a consultation paper today ‘Better targeted superannuation concessions’ on the proposed measure to reduce the superannuation tax concessions available to individuals whose total superannuation balances exceed $3 million. The proposed measure, if legislated, will apply from 1 July 2025.This consultation paper expands on the Government’s announcement of this measure on 28 February 2023, which included a fact sheet ‘Better Targeted Superannuation Concession’. You can view the Treasurer’s media release which includes the fact sheet here.
The proposed measure is summarized below:
- The policy will commence on 1 July 2025 and apply from the 2025-26 financial year onwards. This means individuals with a total superannuation balance (TSB) more than $3 million on 30 June 2026 will be subject to the new arrangements.
- Earnings on the part of an individual’s TSB over $3 million will attract an additional 15% tax. Where an individual has multiple superannuation accounts, a combined earnings amount will be calculated.
- Earnings for this purpose will be calculated using a formula. If an individual has negative earnings for an income year, these can be carried forward indefinitely and offset against future earnings.
- The additional tax will be applied directly to the individual. There will be no change to the tax arrangements within superannuation funds. That is, there will be no change to the way that a superannuation fund calculates taxable income.
- The Australian Taxation Office (ATO) will collect the relevant information and calculate the tax liability. Once the ATO has calculated the tax liability, a notice of assessment will be sent to the individual. This is separate to the individual’s personal income tax. The individual can choose to pay the tax directly using personal assets or alternatively, they can choose to release money from their superannuation account.
- Information relating to the 2025-26 financial year is likely to be reported in the first half of 2027. Therefore, the first notifications for the new tax liability are expected to be issued in the second half of 2027.
- How the measure will apply to individuals with defined benefit superannuation accounts is yet to be determined. The consultation paper seeks views on this issue.
- Constitutionally Protected Funds (CPFs) are not able to be subjected to tax directly due to constitutional limitations. Modifications to preserve the tax-exempt status of ‘constitutionally protected persons’ (CPP) may be required. However, such interests will still need to be counted as part of a CPP’s total superannuation balance for this measure.
The (polarizing) issues
Many aspects of the proposed measure have been called out as not being fair or equitable:
Determination of ‘earnings’
The new measure cannot be described as a ‘30% tax on earnings over $3 million’. This is because ‘earnings’ for the additional tax is not based on the fund’s taxable income. An additional 15% tax is applied to ‘earnings’ determined by a formula based on the movement in an individual’s TSB in the financial year, adjusted for withdrawals and contributions. This results in tax being applied to net unrealized gains – a concept that has been called out by industry.
However, the consultation paper states, ‘The approach to estimate earnings seeks to be simple and minimise unnecessary or additional compliance costs by largely relying on data reported through existing arrangements‘. With any arbitrary determination of a base upon which to levy tax there will be winners and losers.
TSB starts below $3 million but exceeds $3 million by 30 June
Where an individual’s TSB at the previous 30 June was under $3 million but was more than $3 million by the following 30 June, there was a concern that the additional 15% tax would be applied to a portion of earnings on super below $3 million. The consultation paper has proposed that if an individual’s TSB from the prior 30 June is less than $3 million and their TSB at the following 30 June (after adjusting for withdrawals and contributions) is more than $3 million, the previous 30 June TSB will be adjusted to equal $3 million for the purposes of calculating earnings.
Negative earnings where 30 June TSB is below $3 million
Whilst the proposed measure allows an individual to carry forward negative ‘earnings’, where their 30 June TSB is below $3 million, but started above $3 million, it appeared that the amount of negative ‘earnings’ would be lost and not available to be carried forward. The consultation paper proposes similar adjustments as outlined above (TSB starts below $3 million but exceeds $3 million by 30 June).
In this case the 30 June TSB for the relevant financial year’s will be adjusted to equal $3 million for the purposes of calculating earnings. Making this adjustment to closing balances ensures that individuals who drop below the threshold are able to have negative earnings recognised for future years (in the event that their balance grows again to exceed the threshold).
Insurance proceeds and family law splits
There was a concern that where an individual’s interest was increased by insurance proceeds, or a family law split that this could result in:
- The individual’s TSB on 30 June exceeding the $3 million threshold, because of these payments; and
- An additional 15% tax being effectively applied to non-assessable amounts.
It appears that the consultation paper addresses this by treating these amounts as contributions, for the purpose of the calculation of ‘earnings’. After tax (net) contributions are subtracted from the individual’s closing (30 June) TSB to ensure an increase in the TBS for the relevant financial year reflects positive earnings, not amounts and individual has contributed. In relation to what is treated as net earnings, the consultation paper states:
“Net contributions include SG contributions or voluntary contributions, including downsizer contributions, payment of insurance benefits for policies owned inside superannuation and transfers such as family law splits.”
Consequently, insurance proceeds and family splits would not be included in the ‘earnings’ amount.
Any method that arbitrarily determines an amount to which tax is levied, is exactly that, a formula to make it administratively simple to determine (and determined by the ATO, not the superannuation fund). There will be winners and losers under any arbitrary approach.
The only method that would achieve the policy intent of being fair and equitable is for the additional 15% tax to be applied to taxable income, which does not include unrealised gains. This could be achieved, for example, by creating a new type of superannuation interest for balances above $3 million that is taxed at the higher rate. However, there could be push back from various sectors who may see such an approach as a compliance burden that increases costs for members.
The consultation period is open until 17 April 2023. That’s just over two weeks and Easter break falls in the period. So, if you wish to submit your view and respond to the questions asked in the consultation paper, don’t delay. I expect that there will be many submissions, particularly from the professional associations, and I look forward to reading them as well as seeing if they result in any changes to the proposed measure and how it’s implemented.