The decision by Labor to announce a change to tax concessions within super was hardly a surprise, and so was the mechanism they propose to deliver this outcome. A hard cap of $3 million was never going to work, so the only logical step was to introduce a higher earnings tax on member benefits above $3 million. Importantly, this doesn’t force a sell-down of assets, but rather provides a comparative rate to the taxation of companies.
The result of this change, should it pass, will mean that we further expand our already tiered superannuation system:
| Tax Rate | Contributions | Earnings | Death Benefit |
| 0% tax rate | Applies to individuals with income < $37,000 | Applies to pensions in the retirement phase (within TBC). | When paid to a tax dependant (e.g. spouse) |
| 15% tax rate | Concessional contributions (currently $27,500) | Accumulation benefits
(proposed TSB < $3 million) |
When taxable component (tax element) is paid to a non-tax dependant (e.g. adult child) |
| 30% tax rate | Concessional contributions for high income earners – >$250,000 (includes Div. 293 tax) | Accumulation benefits
(proposed TSB > $3 million) |
When taxable component (untaxed element) is paid to a non-tax dependant (ie. via insurance proceeds) |
An election promise broken?
How the Government balanced the timing of this announcement against their previous commitment to not making any changes to superannuation was always going to be an interesting one…
How have they achieved this? Well, by deferring any start date until the 2025/26 financial year where it will require re-election – these measures will then be implemented under a different term of government.
Dealing with ‘mega-balances’
Conceptually, I think many people will agree on the ‘pub test’ to say that the super tax concessions for ‘mega’ member balances should be paying their greater share of tax. However, it is important to remember that this process actually started back in 2017, with the introduction of the transfer balance cap measures. These super reforms ultimately created an end date for large balances to remain in super – the baby boomers, under the current laws are, in reality, the last superannuants that will have such significant balances.
Sure, there might be a few outliers with amazing investment performance (think successful start-ups), but the super laws now require benefits to leave the super system once tax dependants no longer exist – that is, the next generation.
Add contribution caps in getting the money back into super, and you can see that this issue around tax concessions isn’t an infinite problem – unlike CGT concessions on assets, or CGT exemptions on the family home. But there’s a difference between making unpopular decisions and political suicide in order to fix the budget…
The higher earnings tax concept
Interestingly, this earnings tax concept isn’t anything new… in fact, Labor’s fairer super plan looked to introduce an earnings tax style arrangement in direct opposition to the Coalition’s now transfer balance cap that started on 1 July 2017.
The concept? To apply tax exempt earnings to the first $75,000, then a 15% tax rate on amounts above. Now, we’ll have not one, but two policies intertwining (with the transfer balance cap), most likely creating untold complexities in a super system, which is craving for greater simplicity. You can read Labor’s former proposal in the link below:
https://apo.org.au/sites/default/files/resource-files/2015-04/apo-nid63465.htm
This begs the question? Will earnings and by extension account balances, currently quarantined under the retirement phase transfer balance cap regime, be excluded from the calculations? Time will tell… it will also tell us whether to expect another line in the sand with reference to CGT. Will we see another opportunity to reset cost bases in the lead up to 30 June 2025? Imagine tracking future 2017 and 2025 deferred realised gains!
The devil will be in the detail
It was the Government’s intention to settle on an objective for superannuation before considering any changes as part of this year’s budget. The problem was however that their conversations around these high balances sparked a bush-fire that Labor quickly needed to get under control. Therefore, here we are having seen the Prime Minister and Treasurer announce these proposed measures to take the heat out of the conversation and refocus the narrative towards cost-of-living relief and more in the lead up to the budget. This is ‘politics 101’.
The announcement links the changes to less than 0.5% of all Australians – around 80,000 people – arguably most in SMSFs. Interestingly, the amount does not intend to be indexed? So in reality, this will capture more and more individuals as the value of money rises over time.
Where to from here?
The Government intends on introducing enabling legislation to implement the adjustment as soon as practicable. Consultation with the super industry and other relevant stakeholders will also take place to settle the implementation of the measure.
The focus of the additional tax rate may in fact become a greater driver of SMSFs. Why? Whilst the majority of individuals impacted by these measures already sit within SMSFs, the ability to have a greater control of the tax position and account balances of members will surely see people take a closer look at this type of structure.
But in reality right now, there are more questions than answers. As mentioned above, this was about putting a fire extinguisher to a fire before it got out of control (in the lead up to the budget). Importantly, we have plenty of time, but people rightly should feel nervous about the announcement until further details are provided.
One thing is for sure… the May budget will provide a much greater focus on superannuation than it has in recent years.
You can read the Treasurer’s media release on this announcement here.
Both Tim Miller and myself will be exploring this impact of this announcement as part of the upcoming SMSF Day events around Australia between 16 March – 5 April 2023. You can find out more and register here.
Here are some points:
1. Yes, the “pub” test will be used and some will say rightly so. However, $3m was not debated.
2. Will the 30% tax applied to the Prime Ministers and all other Commonwealth Pension recipients both past and current. It had better, and it had better also apply to Keatings Pensions, and Howards Pension and every other politician ,judge, academic, and public servant.
3. If I have $6m in my SMSF, and the total taxable earnings is say $100,000 for simplicity, then presumably 50% of the $100,000 will bear 30% tax. With the tax rate for SME at 25%, maybe I should take a lump sum of $3m and put it into a Trust with individuals and a private company as beneficiary . Then distribute to the company and pay 25% tax. I am not even trying yey and I have primary tax down 5%.
4. Does the government think the Taxation Industry will not devise alternatives?
5. I am now experiencing young people, particularly in their 30s saying to me, I do not want to put any more than legally necessary into super because it is too restrictive, and I will be too old, and I want other wealth methods.
6. Politicians LIE!! Loss of Trust in Institutions is the result. It will get worse and the young approach super in a completely different light.
7. No indexation is “bracket creep” and is dishonest.
8. “If” the property boom is receding, then asset prices will be written down reducing the SMSF assets. Similarly, as equity markets rise and fall as they will, every year asset prices will change, therefore providing a tax planning opportunity to remove assets as against leaving them in super.
9. Grandfathering of people aged 75 Plus??
10. If super is the main asset outside of the family home, the personal tax rates will allow at least $20,000 per person tax free before possible other exemptions apply.
11.No wonder people, both young and old, lose confidence and Trust in our Institutions and politicians when they constantly entice the public to follow some action and then when we do, they change the rules.
(1) through to (11) are all valid, the reality is that until we see some more details via Treasury consultation, we don’t know where this might land?