So, the federal government has proposed a tax on superannuation balances over $3 million. “Well, that won’t affect me,” you think… or will it? Accountant GAIL FREEMAN offers a worrying perspective…

LET’S consider, firstly the $3 million is not indexed, which may not mean a lot until I tell you that the maximum superannuation cap from July 1, 2023, is $1.9 million and if you had $1.9 million in super in 2003, inflation would have increased the value of this balance to more than $3 million today without taking earnings into account. 

Inflation over this period has averaged at 2.76 per cent per year. Like you, I have no idea what inflation will be in the future, but we do know it is currently high at around 7 per cent and with present economic volatility, it only has to average between 4 per cent and 5 per cent to exceed $3 million in 10 years’ time.  If you are not affected now you well could be in the not-too-distant future.

How will this tax work? 

It will be charged at 15 per cent on some of the proportion of the fund, it will be charged to the member personally and the member will be allowed to withdraw money out of the fund to pay the tax.

The calculation is based on the balance of the member’s account at the end of the year; that is, it will initially be calculated at June 30, 2026. The actual tax calculation will be based on a formula that calculates the proportion of the fund value over $3 million against the total fund balance and this arrives at the percentage of the fund that is above $3 million. 

It is not based on earnings, but this calculated percentage of the fund increase is taxed at 15 per cent. 

No other tax like this

The problem is that unrealised capital gains are now being taxed. There is no other Australian tax that does this. 

I have to wonder whether the next time the government is short of money will it seek to tax the unrealised gains on investment properties? So, if you are liable for this tax, you will be paying it on assets that you haven’t sold and, of course, these assets could go down in value next year and/or you could sell them for less. 

Sadly, if the value of your superannuation fund goes down, you won’t get a tax refund. You will carry that loss forward to the next year. In simple terms, in the first year you paid tax on a capital gain that the fund did not receive and you cannot get your money back in the next year. Scary, isn’t it?

Remember, this is only a proposal and in the May budget we may have a clearer picture, but there are other consequences of this proposal that could affect each of us that has a partner. 

If the partner dies and has a pension that they leave to their partner who is close to the $1,900,000 cap, the second pension would likely push them over $3 million. 

So, as time goes on many more people than the 80,000 suggested by the government will be caught in the net. I am also curious as to the position in 10 years when the maximum cap could have increased above $3 million, but the unindexed extra tax cap will now be below that figure. How will that be dealt with?

We are currently looking at strategies to reduce the impost of this tax on our clients, but until the legislation is passed there is no point in rushing to get balances below $3 million. 

It is a balancing act to make sure that the amounts outside super and within super provide the best outcomes.

If you are concerned that your superannuation may be above $3 million and that you are going to have a problem in 2026 call the expert team at Gail Freeman & Co Pty Ltd on 6295 2844 or visit gailfreeman.com.au

Disclaimer
This column contains general advice, please do not rely on it. If you require specific advice on this topic please contact Gail Freeman or your professional adviser.
Authorised Representative of Lifespan Financial Planning Pty Ltd AFS Lic No. 229892.