The federal government’s proposed $3 million superannuation tax remains firmly on the agenda, despite ongoing debate within the financial sector and among high-net-worth Australians.
While most people will not be directly affected, the changes could have significant implications for those with larger balances who are planning for retirement.
For those approaching retirement, understanding how this additional tax will work is essential. It will influence not only how wealth is managed within superannuation but also how broader retirement planning strategies are shaped.
What is the $3 million super tax?
The proposal, first floated in 2023, introduces an additional tax on superannuation earnings for individuals whose balances exceed $3 million. Currently, most super fund earnings are taxed at 15%. Under the new Division 296 system, the portion of earnings attributable to balances above the $3 million threshold will attract an additional 15% tax, effectively lifting the rate to 30%.
For example, if your super balance is $3.5 million, the first $3 million would continue to have earnings taxed at 15%. The remaining $500,000, however, would see its earnings taxed at 30%. This approach creates a dual-tiered tax structure within superannuation for high-balance individuals.
How will earnings be calculated?
One of the more technical aspects of the proposal is how “earnings” will be defined. Unlike the current system, which primarily looks at actual realised gains such as dividends, rental income or interest, the proposed measure will also include unrealised capital gains.
This means that if the value of investments within a super fund increases due to market movements, even if the investments are not sold, that increase in value could still be counted as earnings for tax purposes.
For instance, imagine you have a self-managed superannuation fund (SMSF) with a balance of $3.5 million at the start of the financial year. You own a property inside your SMSF that increases in value by $300,000 over the year. This $300,000 counts as your SMSF’s earnings, bringing the total balance to $3.8 million.
The proposed Division 296 tax would only apply to the portion of earnings attributable to the balance above the $3 million threshold. In this example, $800,000 of your total balance is above the threshold, which is approximately 23% of the total $3.5 million starting balance. Therefore, 23% of the $300,000 earnings – around $69,000 – would be subject to the additional 15% tax. The remaining $231,000 of earnings would continue to be taxed at the standard 15% rate.
This approach may create challenges, particularly in years where asset values rise sharply but generate little liquidity. It is different to the way many other taxes work and could create cash-flow issues for some individuals.
Other challenges with the new proposal
In addition to the concerns around what will constitute “earnings”, tax practitioners and financial advisers have flagged another potential problem: the $3 million threshold is not indexed. This means that, over time, more people will be impacted as investment growth and inflation push their super balances closer to or above the $3 million threshold.
Even moderate growth in super balances could gradually expose individuals who were previously unaffected, increasing their tax liability without any change in their contributions or lifestyle.
Why does the proposed super tax matter for retirement planning?
For Australians approaching retirement, particularly those with larger super balances, the proposed change could alter the way they plan their financial future.
Your income streams might be impacted
Many retirees rely on superannuation to provide a steady income stream in retirement. With the introduction of the $3 million super tax, the after-tax returns on higher balances may be reduced. This could lead to less disposable income in retirement unless alternative strategies are explored.
You might face liquidity challenges
Because unrealised gains will be taxed, some individuals may face a tax bill without the corresponding cash flow to cover it. This is particularly relevant for those holding illiquid assets such as property or private investments in their super fund. Careful cash flow planning will become even more important to avoid the need to sell assets at unfavourable times.
You might consider shifting towards other investment structures
The superannuation system has long been one of the most tax-effective ways to save for retirement. However, some high-net-worth individuals may see the proposed rules as a reason to consider additional strategies outside of super. Structures such as family trusts, investment companies or direct personal investment portfolios could become more attractive, depending on individual circumstances.
Preparing for change
At this stage, the proposal is still on the horizon. Legislation will need to pass before it becomes law, and some details may change along the way. However, it is important not to take a wait-and-see approach.
Planning early allows individuals to assess potential exposure, explore alternatives and avoid being caught by surprise when the rules take effect. This might involve restructuring your assets over time to minimise the tax burden or adjusting your estate plans, as the new tax could also affect the wealth you pass on to your beneficiaries.
Working with an experienced Gold Coast financial adviser can help. From assessing how balances are tracking towards the $3 million threshold to exploring the role of trusts, companies or personal investment accounts, advisers can help navigate the change if and however they are implemented.
Staying informed protects your retirement
While not yet fully legislated, the proposed $3 million super tax could become a critical issue that will reshape superannuation. For high-net-worth individuals, particularly those nearing retirement, the changes could have real financial consequences.
The good news is that with proactive planning, these challenges can be managed. A trusted Gold Coast financial adviser can help assess your situation, develop tailored strategies and provide peace of mind that your retirement plan is well-positioned for the future.
Frequently asked questions
The $3 million superannuation tax is a proposed federal measure that applies an additional 15% tax on earnings for the portion of a super balance exceeding $3 million. This effectively raises the tax rate on these earnings from 15% to 30%.
Primarily, high-net-worth individuals with super balances above $3 million will be impacted. Most Australians with smaller balances are unlikely to be affected. Consulting a Gold Coast financial adviser can help assess if your super might be impacted.
Yes. The additional tax could reduce after-tax returns on super balances above $3 million, potentially affecting retirement income streams. Working with a financial adviser can help adjust your retirement planning strategies to account for these changes.
Some high-balance individuals may consider alternative investment structures outside super, such as family trusts, investment companies or personal investment portfolios. Getting started early with a financial planner can help explore these options.
General advice warning:
The information in this blog is of a general advice nature only and has been prepared without taking into account your personal objectives, financial situation or needs. Because of that, you should, before acting on the advice, consider the appropriateness of the advice, having regard to those things.
Find out how the proposed super changes could affect your savings. Contact the trusted Gold Coast financial advisers at RFS Advice to discuss your situation and get tailored guidance for your retirement planning and long-term financial goals.
