You may have seen recent commentary about a new cap on large super balances. It has caused a lot of discussion, but the changes will not affect that many people. Most of us do not really need to worry.
What does the Change Affect?
The change affects the way super funds pay tax.
Earnings on investments held within a super fund are usually taxed at no more than 15%. This is the rate that applies to funds that are in ‘accumulation phase,’ which is a fancy way of saying that the member is still saving and is not drawing an income stream from their super. (Funds paying an income stream usually face a lower rate of tax, often 0%).
15% is typically a lower rate of tax than the rate that would apply if the same investment was held outside of super. For example, an individual will pay income tax at their personal marginal tax rate for any investment earnings that are generated by assets they own in their own name. What’s more, super funds pay tax at a ‘flat rate,’ which means that the rate of tax is the same regardless of the amount of income. This differs, again for example, from personal income tax, where the rate payable tends to increase as the person’s total income increases.
Because 15% is lower than other rates of tax, it is usually described as a ‘concessional’ tax rate. The size of the concession is the difference between the tax that the super fund pays and the tax that some other investor would pay on the same earnings.
There is no limit on the amount of investments that a super fund can hold. Similarly, until now, the concessional rate of no more than 15% has applied to the investment earnings of all funds, regardless of size.
So, What is Going to Change?
From 1 July 2025, the concessional rate of 15% will only be payable on earnings from the ‘first’ $3 million that a person has in super. Earnings on income generated from assets greater than $3 million will be taxed at 30%.
To give a simple example, suppose Dinesh has $4 million in superannuation. The money is all held in a term deposit, earning 3% per year. This adds up to $120,000 per year. At the moment, Dinesh’s super fund would pay $18,000 in tax – being the flat rate of 15% applied to the earnings of $120,000.
After 1 July 2025, the earnings will be taxed differently. The first $3 million in assets will generate $90,000 in interest. This interest will still be taxed at 15%. But the remaining $1 million in assets will generate a further $30,000 in interest. This interest will be taxed at 30%. So, Dinesh’s fund would pay $22,500 in total tax after the change.
Who Will This Affect?
The ATO estimate that about 80,000 Australians have $3 million or more in super. That said, most of these people will have balances that are relatively close to $3 million. The effect of the change will actually be quite minimal on people whose balance is only a little over $3 million, because it is only the earnings attributable to assets over $3 million that will pay more tax. If most of your super is less than $3 million, most of your earnings will still be taxed at 15%.
PS: there is one lucky Australian with more than $540 million in super. Obviously, privacy laws prevent us from telling you who this person is!
What Can Be Done?
While the change will not affect many people, we actually hope that many of our clients face the problem of 30% earnings tax on their super! We file ‘too much super’ in the cabinet marked ‘nice problems to have.’ We tend not to even lock that cabinet.
That said, there are some basic planning strategies that can be applied. If a member’s personal balance is approaching $3 million, then it might make sense to direct future contributions into the hands of someone else. If you are part of a couple, for example, then the $3 million cap means that the two of you can have up to $6 million in super between you before you pay the increased tax. If one member of the couple is approaching the new cap, then it makes sense to direct as many new contributions as possible into the fund belonging to the other spouse.
As the date of the change approaches, we will have more to say on what you can do if the change affects you. Until now, unless your super is at or near $3 million, you don’t need to worry about this one. And if your super is over $3 million, you probably shouldn’t be worrying anyway.