You’ve probably heard about the big statement that Labour made about potential changes to superannuation. The government stated on the 28th of February 2023 that anybody with a superannuation balance of more than $3 million would be subject to a 30% concessional tax rate on profits beginning on the 1st of July 2025.
The Labour government has stated that the modifications were made to build a more sustainable and fair superannuation system..
Superannuation balances over $3 million after subtracting withdrawals and contributions are subject to an additional 15% tax per individual every financial year from the Australian Taxation Office (ATO). Unrealised gains and losses will also be subject to annual taxation.
The industry serving self-managed superfunds will be hit especially hard because their accounts typically have larger amounts.
The tax can be paid by the individual or deducted from their superannuation. If a person has more than one superannuation account, they can choose which account the tax will be taken out of. Until altered by future legislation, that $3 million will always remain the same.
How will this new limit work?
The Treasury Department provided more information about the new tax rate one day after announcing the policy shift.
While it was widely assumed that the 30% rate would be added as a third tier in the tax calculation for large super balances (beyond the 0% for the pension amount and the 15% for the accumulation amount until the $3 million limit is reached), a different approach based on the individual has been chosen.
For now, no maximum balance is still allowed in the accumulation phase.
Total Superannuation Balances (TSBs) will be tracked for each citizen, with an additional 15% tax levied on earnings for individuals with TSBs over $3 million after a fiscal year. After subtracting withdrawals and deposits, the difference in the TSB between the beginning and end of the fiscal year will be the profit.
Those with incomes over $250,000 can deduct the additional tax from their superannuation or pay it using other funds, following the same rules as those used for the Division 293 Tax.
The new tax is not included in an individual’s taxable income computation. The new tax threshold applies only to the taxpayer and not to any associated funds, such as an SMSF.
When you look at Treasury’s case, it all becomes clearer. Earnings include unrealised gains and losses, which are unexpected. In 2026-27, TSBs will be tested for the first time when tax responsibility notices are sent out.
What will happen to defined benefit accounts?
The government plans to implement widespread parity to treat defined benefit interests fairly. The Treasury will consult to determine how defined benefit interests should be handled.
Superannuation Taxes in Effect Today
Concessional income and capital gains tax rates are applied to retirement savings maintained in a conforming superannuation fund. The extent to which a person is exempt from paying taxes on their superannuation earnings is generally determined by their age and whether or not they have retired or otherwise met a condition for release.
Earnings from a retirement account are taxable at a rate of 15% for those who still need to fulfil their release conditions. Suppose you have completed the state of release for your superannuation fund and have chosen to convert all or part of your super fund balance to support a pension. In that case, you will not be subject to taxation on the earnings generated on that balance.
The transfer balance threshold, now $1.7 million, is a key limitation on the tax-free portion of the amount. Any income earned on assets that are not contributing to a pension or that exceeds the transfer balance cap is subject to a tax rate of 15%.
Suggested modifications to retirement income taxes
The administration has proposed capping the preferential 15% tax rate at $3 million in member balances.
Individuals with combined superannuation account balances over $3 million would be subject to an extra 15% tax on earnings beginning on 1 July 2025.
Earnings on the portion of the fund that is less than $3 million will continue to be taxed at 15% or 0%, respectively, depending on whether the fund is in the accumulation or pension phase, while profits on the portion that is more than $3 million would be taxed at 30%.
The earnings used to administer the extra 15% tax are determined by taking the difference between the entire superannuation balance at the beginning and the end of the financial year and multiplying it by the withdrawals and contributions made during that time.
That is, gains that have yet to be realised will be included in the total amount earned. This could also mean that the one-third CGT discount that normally applies to superannuation funds will not be applied to any realised capital gains in earnings over $3 million.
If a super fund has a loss in one fiscal year, the loss can be used to offset future taxable earnings.
While the statement offers only a few specifics on how this tax will be collected, it does state that:
- individuals will have a choice of either paying this additional tax directly or from their superannuation funds, and
- this tax will be distinct from an individual’s income tax, comparable to the existing Division 293 tax scheme.
Impact of the changes
People in Australia whose superannuation account balances are more than $3 million will be affected by this change.
Figures presented by the government imply there will be roughly 80,000 superannuation members.
Both large and small superannuation trustees will need to think about how their systems will need to function by the law should this change be enacted.
Here’s a sample from the Treasury’s fact sheet:
Carlos is a retired 69-year-old. On 30 June 2025, the value of his SMSF’s superannuation was $9 million; on 30 June 2026, it increased to $10 million.
During the year, he takes out $150,000 and doesn’t add anything to the account.
Carlos’s take-home pay is $1.15 million (10 million minus 9 million plus 150 thousand).
With a total income of $10,000,000, he keeps 70% of what he makes after tax and other expenses (i.e., $3,000,000)
His tax bill for 2025–2026 will be $120,750 (15 percent of $1.15 million times 70 percent)
Conclusion
The financial planning profession got a lift, as did the arguments favour increasing one’s investment in one’s home, shifting one’s retirement savings to one’s lower-balance spouse, and establishing a family trust. Chalmers and Albanese will need to convince voters that it is the appropriate policy to cut the super cost before the new tax rate impacts the bank accounts of major super-holders.
