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Superannuation was established to help Australians fund their retirement, but legislation surrounding it is ever evolving.
One change that is on the horizon will increase the tax payable for those who have a total super balance (TSB) of more than $3 million.
Find out what’s set to happen and how this may affect you.
Proposed superannuation tax changes – Division 296 tax
At present, when accounts are in accumulation phase, superannuation earnings are taxed at a concessional rate of 15%.
In early 2023, Treasurer Dr Jim Chalmers announced a proposal to charge an additional 15% per cent tax on earnings accumulated by accounts with a TSB of over $3 million. The change will affect individuals who exceed this threshold; This is known as Division 296 tax.
If you have over $3 million in your super fund or if you are heading towards this amount, here’s what your financial planner and accountant want you to know:
Division 296 tax applies to the proportion of earnings related to amounts over $3 million
There has been some confusion, with people assuming their entire super earnings will be taxed at a higher rate, but this is not the case.
The plan is to apply the additional 15% Division 296 tax on taxable superannuation earnings. The formula to calculate taxable superannuation earnings is very complex, however in a nutshell it is the percentage of the fund’s earnings (realised and unrealised) equal to the percentage of the fund’s balance that exceeds $3 million. Division 296 tax is applied to that percentage only.
Changes won’t be backdated
If the proposed changes become law, it will begin with the 2025-26 financial year and will not be backdated.
Legislation is not confirmed
The proposal still needs to pass through parliament. As reported by The New Daily, The Greens have said they will vote for the changes if the government also implements superannuation payments on paid parental leave. The government is expected to be lobbied heavily to amend some of the more contentious aspects, such as the earnings calculation including unrealised capital gains.
Your super account may still be the best place for your money
An additional 15% tax on the proportion of super fund earnings related to amounts over $3 million is still a concessional rate. You may like to discuss the pros and cons of having over $3 million in super with your financial adviser.
The looming change may mean you decide to withdraw some of your super (if you are eligible to do so), switch up your investment strategies and review your estate planning.
Before you make decisions, you need to look at the whole picture of how and when you will be taxed with the help of your accountant and financial planner.
The threshold is not indexed but may increase over time
While the threshold is not indexed, any future government could raise the $3 million threshold. As Finance Minister Katy Gallagher admitted, “In 30 years, Treasury predicts that roughly only the top 10% will retire with superannuation balances of around $3 million.”
There are still quite a few questions to answer when it comes to applying this tax change. As the date approaches, if your superannuation balance is very healthy, it makes sense to start working with a financial planner to figure out where to keep the bulk of your retirement savings.
Need help making a plan for your super? Get in touch with Crest Advisors today.
