Superannuation Reforms Impacting Retirement Planning

Superannuation in Australia has become a taxpayer-funded inheritance scheme. Our system offers billions of dollars in tax breaks each year to wealthier people who will never spend them in retirement. The federal government’s plan to tax the earnings on super balances bigger than $3m at 30% (up from 15%) is a first step to stopping that. The earnings tax breaks on balances larger than $3m can easily end up being more than poorer retirees get from the Age Pension. And it’s unlikely much, if any, of this boost will get spent in retirement, which means earnings tax breaks just end up subsidising bequests to the children of particularly well-off parents. The reform is projected to affect about 80,000 people and trim earnings tax breaks for those with very-high balances by about $2b a year once the policy is fully operational. Claims that not indexing the $3m threshold will result in the tax affecting most younger Australians, or that it will somehow disproportionately affect younger generations, are simply nonsense. Just 0.5% of Australians have more than $3m in their super, and 85% of those are aged over 60. And even if the threshold were not adjusted until 2055 – in 10 federal elections’ time – it would still only affect the top 10% of retiring Australians. Far from abandoning the proposed $3m threshold, the government should go further and drop the threshold to $2m, saving the budget a further $1 billion a year. But should the government persist with applying the higher tax rate only to super balances bigger than $3m, the threshold should not be indexed until the real value of the threshold falls to $2m due to inflation. That will occur by around 2040, or in about five federal elections’ time. It’s true that levying a higher tax rate on the earnings of large super balances is complicated by the fact that existing super earnings taxes are levied at the fund level, not on individual member accounts. Yet there are seldom easy answers when it comes to tax changes. Levying a 15% surcharge on the implied earnings of the account over the year (the change in account balance, net of contributions and withdrawals) will impose a tax on unrealised capital gains on superannuation. But most of those with $3m in super are retirees who must already have enough cash on hand to pay out pensions each year in line with the ‘minimum draw-down’ rules. Further, under superannuation law, SMSFs are required to have an investment strategy that accommodates liquidity and the ability of the fund to discharge its liabilities. And in any case, the tax does not have to be paid from super. Australians with large super balances typically earn as much income from investments outside super. Australia faces the twin challenges of big budget deficits and stagnant productivity. Tax reform will be needed to respond to both. But if we can’t even agree to trim unneeded super tax breaks for the wealthiest 0.5% of Australians, what hope have we got?

I have received several calls from concerned LPs regarding what the impact of the proposed tax on unrealised gains means to them. Summary below. Put simply, where a member’s total super balance exceeds $3m and there has been an increase in their balance at the end of the relevant income year, the member will be taxed 15% on the unrealised movement. This has the following implications: 🫣 The tax is imposed directly on the individual and is separate from the tax arrangements of the superannuation fund or scheme 🫣 It will adversely impact those with illiquid assets, and those who may have no readily available funds to pay the tax (albeit there is a mechanism to access your super to pay the tax) 🫣 It can give rise to 'a tax on a tax' situation given the member pays tax on unrealised gains and the fund pays tax on realised gains 🫣 Negative super earnings are quarantined and can only be used to offset future earnings and do not give rise to a refund. Tax symmetry and fairness suggests that a refund should be provided for any negative super earnings, but this is not the case 🫣 The $3 million threshold is not indexed meaning that while the new measure is expected to impact around 80k members initially, this is expected to impact millions of members in the future 🫣 A member will have no ability to withdraw their superannuation balance when it exceeds $3 million, unless they meet existing eligibility requirements to access their super (e.g., retirement) or unless it is to pay the tax Prior to the federal election the Bill (Division 296) was stalled in the Senate. However, the reconstituted government in both houses of Parliament in favour of the current government makes it likely that the Bill will be passed. The relatively short time frame the government has to pass this legislation for a 1 July 2025 commencement seems optimistic, meaning the start date may be pushed back to 1 July 2026. This will inevitably reduce capital investment in early stage companies over the short term, with SMSFs a vehicle of choice for many investors in this space. However, do not forget that investing in ESVCLP funds or ESIC companies as an individual or a trust remains a tax efficient approach and avoids the above complexities. That is if you have funds outside of your super to invest!

I had quite the surprise this week. After my last post prior to the election, I was directed to the Albanese government’s plans to introduce a higher tax rate on superannuation balances over $3 million. At first glance, it seemed fair enough — after all, asking the top 0.5% wealthiest Australians to contribute a bit more didn’t sound unreasonable - and how much do we really need to put away for a comfortable retirement... But yesterday, I was chatting with an accountant who specialises in self-managed super funds (SMSFs) and asked what all the fuss was about... I got a shock. She pointed out something I hadn't fully grasped: the proposed policy will tax unrealised capital gains — essentially, profits on assets that haven't even been sold yet! Now, this might sound technical, but it has real-world implications. Imagine your super fund holding non cash investments, like property. Under this new policy, you'd pay tax on any increase in value each year, even though you haven't actually seen a dollar of that gain in cash. This approach fundamentally breaks from how we traditionally think about tax: normally, you pay when you sell an asset and realise an actual profit. Taxing paper gains introduces a slew of problems — especially for SMSFs holding illiquid assets like property. You might be forced to sell something prematurely just to cover your tax bill. Not exactly ideal retirement planning. I talked to a few financial experts today, they were all genuinely worried. They believe this policy could discourage investment, push capital away from productive uses like funding start-ups and even encourage people to move their investments offshore. The lack of indexation means that, over time, more Australians will cross the $3 million threshold simply due to inflation —not actual increases in real wealth. Furthermore, there are considerable administrative burdens. Valuing illiquid assets annually to assess unrealised gains isn't straightforward — it will likely lead to disputes, complexity and increased costs for fund holders and the Australian Taxation Office. Not exactly what you want from a retirement fund system designed to be simple, stable, and predictable. There's also concern about fairness. For instance, if your super fund balance jumps due to inheritance or an insurance payout, you could inadvertently be dragged over the $3 million threshold and become liable for additional taxes in future years — hardly a fair situation for those dealing with life-changing events. Wouldn't it be better if we considered alternatives such as taxing actual realised capital gains instead of unrealised paper gains aligning with traditional tax principles, avoiding liquidity problems and complexities associated with asset valuation. Anyway, I hadn't heard of it, and I thought I was pretty well informed, Oh apparently its also due to start July 1 2025... Had you realised this? This cant be a good precedent to set surely? I’m keen to hear anyone's views.

𝗧𝗵𝗲 𝗽𝗿𝗼𝗽𝗼𝘀𝗲𝗱 𝗗𝗶𝘃𝗶𝘀𝗶𝗼𝗻 𝟮𝟵𝟲 𝘁𝗮𝘅—𝗟𝗮𝗯𝗼𝗿’𝘀 𝗰𝗼𝗻𝘁𝗿𝗼𝘃𝗲𝗿𝘀𝗶𝗮𝗹 𝟭𝟱% 𝗮𝗱𝗱𝗶𝘁𝗶𝗼𝗻𝗮𝗹 𝘁𝗮𝘅 𝗼𝗻 𝘀𝘂𝗽𝗲𝗿 𝗯𝗮𝗹𝗮𝗻𝗰𝗲𝘀 𝗮𝗯𝗼𝘃𝗲 $𝟯 𝗺𝗶𝗹𝗹𝗶𝗼𝗻—𝗶𝘀𝗻’𝘁 𝗲𝘃𝗲𝗻 𝗹𝗮𝘄 𝘆𝗲𝘁, 𝗯𝘂𝘁 𝘁𝗵𝗲 𝗔𝗧𝗢 𝗶𝘀 𝗮𝗹𝗿𝗲𝗮𝗱𝘆 𝗼𝗻 𝘁𝗵𝗲 𝗺𝗼𝘃𝗲. The Australian Financial Review reports that wealthy families and their advisers are being watched closely, with the Tax Office confirming it’s paying attention to “behavioural responses” to the proposed tax. That includes people restructuring their superannuation affairs, transferring assets, or considering winding up SMSFs altogether. But here’s what’s particularly alarming in my view: the ATO may be considering the use of Part IVA, the general anti-avoidance rule, to target legitimate restructuring done in anticipation of the new tax. If true, this would represent a major expansion of Part IVA’s application. Restructures that comply with all superannuation rules and occur at arm’s length may still come under scrutiny simply because they reduce exposure to a future tax. If a person moves assets out of super using the proper legislative pathways, why should that attract the threat of Part IVA? This issue could affect farmers, business owners, and high net worth individuals who’ve long used super as a succession planning tool. The new tax—particularly because it taxes unrealised gains—has sparked real concern about the long-term stability and fairness of the superannuation system. The ATO may be fortified in its actions by the recent Full Federal Court decision in Merchant v Commissioner. In this case it was held (by majority) that the realisation of a capital loss prior to the realisation of a capital gain was a scheme to which the general anti-avoidance rules should apply. As professionals, we must think carefully about how we advise clients. What once seemed like sensible planning could soon be viewed through an entirely new lens by the ATO. For more insights into the impact of this new tax and how the anti-avoidance rules may be applied, become a member at https://lnkd.in/gx5pwZRq. We’re providing the analysis and education accountants in public practice need right now. The article in the AFR can be accessed here: https://lnkd.in/gJJbCXpG