After announcing the proposed measures to introduce an additional 15% tax rate on fund earnings for member’s with a total super balance (TSB) above $3 million, it didn’t take too long for Treasury to provide guidance on how these rules intend to work.  As part of the Treasurer’s announcement, a fact sheet was released that provided workings on how these measures intend to operate.

In this blog post, we explore what the Government has announced, including the important issues and considerations we’ve unpacked through the examples provided.

 

How the announcement intends to work

Individuals at the end of the financial year with a TSB > $3.0m will be subject to tax of 15% on earnings. The tax is in addition to any tax the SMSF pays on earnings in accumulation (ie. 30% tax rate applies).

The tax only applies to the proportion of earnings corresponding to balances > $3.0m.  The calculation works with reference to the difference in the TSB at the start and end of the financial year, adjusted for withdrawals and contributions (note: this will include unrealised changes in asset values)

In a year where the member’s TSB reduces (ie. negative earnings), the amount can be carried forward and offset against tax in future years’ tax liabilities.

To pay the liability, the individual has the choice to either:

1. Pay the tax personally; or
2. Release from their super fund.

Where a person holds multiple interests across different super funds, the individual can elect from which fund the tax is to be paid.  The tax will operate similarly to the existing Div 293 tax.

 

Calculating the tax

This concept will be unique insofar that currently funds are not required to report (or generally calculate) taxable earnings at an individual member level.  As a result, the calculation will use an alternate method for identifying taxable earnings for members with balances over $3.0m.

Calculation method

(a) The below formula will be used for calculating earnings in a financial year:

Earnings = TSB (current FY) – TSB (previous FY) + withdrawals – net contributions

(b) The proportion of earnings corresponding to funds > $3.0m is calculated as follows:

Proportion of earnings = (TSB [CFY] – $3.0m) / TSB [CFY]

(c) The tax liability is calculated as follows:

Tax liability = 15% x earnings x proportion of earnings

Importantly, the definition of ‘earnings’ captures both assessable and non-assessable income – that is, it includes all notional (unrealised) gains and losses, and other non-taxable items that may increase or decrease the value of a member’s super interest (e.g. tax provisions and non-assessable reserve transfers).

 

Examples

To understand this further, let’s look at the following examples:

 

Example 1 – Balance exceeding $3.0m 

Warren is 52, with a member balance of $4.0m in his SMSF at 30 June 2025. He makes no contributions or withdrawals for the 2025/26 income year.  As at 30 June 2026, his TSB is $4.5m, representing an increase in earnings of $500,000.

His proportion of earnings corresponding to funds above $3.0m is calculated as:

($4.5m – $3.0m) / $4.5m = 33%

As a result, his tax liability for 2025-26 is:

15% x $500,000 x 33% = $24,750

Interestingly, this increase could have been all in unrealised gains (change in market value), and Warren will still have a tax liability to pay – in addition to the subsequent CGT on the disposal of the asset in the future, which must be applied proportionately due to the disregarded small fund asset (DSFA) rules.

 

Example 2 – calculation of earnings

Carlos is 69 years old and retired.  His TSB at 30 June 2025 is $9.0m, which grows to $10.0m on 30 June 2026.  He draws $150,000 during the year and makes no contributions to the fund.  Therefore, he has calculated earnings of $1.15m ($10.0m – $9.0m + $150k).

His proportion of earnings corresponding to funds above $3.0m is calculated as:

($10.0m – $3.0m) / $10.0m = 70%

As a result, his tax liability for 2025-26 is:

15% x $1.15m x 70% = $120,750

Again, this increase in the value of Carlos’ benefits could have been simply derived from a change in market value, and imposes a significant cash flow burden on the fund to require 1.2% of fund value as a penalty tax.  Also remember that Carlos still has a future CGT event on the change in market value on the asset(s), adjusted for any ECPI claim on benefits in the retirement phase.

 

Example 3 – Election to pay liability from funds / concessional contributions in a year

Louise is 40 and working.  At 30 June 2026, she has a balance of $2.0m in an APRA regulated fund and $3.0m in an SMSF.  At 30 June 2025, her member balances were $1.9m (APRA) and $2.9m (SMSF).  Given her age, Louise has not met a condition of release, so she has no withdrawals for the year.  During the financial year, she makes $20,000 of concessional contributions into her SMSF, with the net of tax amount being $17,000.

Therefore, Louise has calculated earnings of $183,000 ($5.0m – $4.8m – $17k)

Her proportion of earnings corresponding to funds above $3.0m is calculated as:

($5.0m – $3.0m) / $5.0m = 40%

As a result, her tax liability for 2025-26 is:

15% x $183,000 x 40% = $10,980

Louise can elect how she chooses to pay the liability – she chooses to pay $5,000 from her APRA regulated fund and $5,980 from her SMSF.

 

Example 4 – Carry forward of earnings loss

David is 70 and has super in both an APRA regulated fund and a SMSF.  His TSB at 30 June 2025 is $7.0m across all funds.  During 2025-26, he withdraws $400,000 from his SMSF and makes no contributions.  At 30 June 2026, his TSB is $6.0m, meaning his calculated earnings are minus $600,000 ($6.0m – $7.0m + $400k).

His proportion of earnings corresponding to funds above $3.0m is calculated as:

($6.0m – $3.0m) / $6.0m = 50%

The earnings loss attributable to the excess balance is $300,000, which David can carry forward to offset future excess balance earnings (Q – will the ATO keep track of this?)

On 30 June 2027, David’s TSB increased to $6.5m, after having withdrawn $150,000. Therefore, he has calculated earnings of $650,000 ($6.5m – $6.0m + $150k).  The calculation requires the carry forward amount to be offset against the earnings in the 2026-27 year, which reduced the earnings amount to $350,000.

His proportion of earnings corresponding to funds above $3.0m is calculated as:

($6.5m – $3.0m) / $6.5m = 53%

As a result, his tax liability for 2026-27 is:

15% x $350,000 x 53% = $27,825

NB. This is different to the example in the fact sheet, to which we believe contains a factual error on the operation of the rules.  Clarification has been sought from Treasury on this matter.

 

In summary

The result of these measures is that if these proceed, there will be a ‘fund liability’ on the income each year (incl. CGT events at the time of disposal) plus an annual ‘member liability’ where the member’s balance exceeds $3 million.  As stated in our previous blog post, stripping back the tax concessions for higher balance members arguably passes the ‘pub test’, but this proposed model is far from a fair and reasonable outcome, in particular where it taxes the unrealised value of assets – it does not happen anywhere else within the current tax system!  There are numerous areas of the existing super laws that influence a member’s TSB that haven’t been discussed in this initial fact sheet that will play an important role in how the tax will apply – consider things like family law splits, reversionary pensions, insurance proceeds, just to name a few!

Both Aaron and Tim will be exploring this issue as part of the upcoming SMSF day events, to help understand the impact of the proposed measures, and what you may need to consider with clients that could be exposed to these changes from the 2025-26 financial year.