Published on 30 Aug, 2023

Understanding the New Tax on Super Over 3 Million

Written by:
Thomas S Phabmixay
General Manager

Page Contents

Starting from 1 July 2025 the new tax on super over 3 million will be subjected to a 30% tax rate, meaning any surplus earnings will generally be liable to an overall tax rate of 30%. Income linked to Total Superannuation Balances (TSBs) under $3 million will still be subject to the regular 15% tax rate, or no tax if associated with super balances in the pension retirement phase.

The proposed changes involve taxing the disparity between a member’s TSB from the current financial year and the previous one, which is then adjusted for net contributions (excluding contributions tax paid by the fund on the member’s behalf) and withdrawals.

Application of the 30% Tax Rate to Excess Earnings

The superannuation account balance earnings that surpass $3 million will be subject to the 30% rate. Income related to balances up to $3 million will still be taxed at the favorable rate of 15%. These modifications will take effect following the upcoming election and will not be applied retroactively; instead, they will pertain exclusively to forthcoming earnings.

Taxation of Super Fund Earnings Under Current Concessional Rules

Under the present regulations, compliant superannuation funds, including SMSFs, typically enjoy advantageous tax treatment on their assessable income, as detailed below:

Taxable income stemming from superannuation fund assets employed to back accumulation entitlements is subject to the concessional tax rate of 15%.

Any regular or statutory income arising from superannuation fund assets that sustain pensions in the retirement phase is exempt from taxation for the fund.

Superannuation Limits, Caps, and Regulations in Effect

Although there is no fixed overall limit on the total amount an individual can hold within the superannuation system, specific thresholds, caps, tax concessions and regulations are involved. This includes:

Contribution Caps

Contribution limits set the highest amount a person can add to their superannuation accounts and still qualify for beneficial tax rates. For example, in the 2023 tax year, the cap for concessional contributions is $27,500, while the yearly limit for non-concessional contributions per person is $110,000.

TSB Constraint for Non-Concessional Contributions

To be eligible for the yearly non-concessional contribution limit in a specific tax year, a person’s Total Superannuation Balance (TSB) as of June 30 of the prior year must be under the standard transfer balance cap. For example, if someone’s TSB was under $1.7 million on 30 June 2022, they would have a $110,000 non-concessional contribution limit for the 2023 tax year.

Transfer Balance Cap for Retirement Phase Pensions

The current balance cap for the 2023-24 financial year is $1,900,000. The transfer balance cap establishes the lifetime maximum amount a person can move into the tax-exempt retirement phase. This is achieved by initiating one or more pensions in the ‘retirement phase.’

It’s worth noting that all of your super account balances are considered when calculating whether you are within the transfer balance cap. If you exceed this cap, there may be implications and restrictions on making further transfers into the retirement phase.

Graphic illustrating the Transfer Balance Cap for Retirement Phase Pensions. For the 2023-24 financial year, the cap is set at $1,900,000. This cap determines the maximum amount one can move into the tax-free retirement phase over their lifetime through one or more 'retirement phase' pensions.

Tax Implications – Breaching the Transfer Balance Cap

If an individual exceeds their transfer balance cap, they may face excess transfer balance tax. For example, if someone with a personal transfer balance cap of $1.9 million for the 2023-24 financial year begins their first retirement phase pension in April 2024 by transferring $2 million from their accumulation balance in a Self-Managed Super Fund (SMSF), they would exceed their cap by $100,000.

This excess of $100,000 would attract an excess transfer balance tax, typically charged at 15% on a notional earnings amount calculated from the surplus. To address this, the individual would need to transfer the excess amount back into the accumulation phase or potentially remove it from the superannuation system altogether.

Determining Eligibility for the 15% Additional Tax from July 2025

The upcoming 15% additional tax on superannuation funds will specifically apply to individuals whose superannuation balances exceed $3 million at the end of the fiscal year. As per the government’s proposal, an individual will be subject to the 15% extra tax in a given income year, starting from 1 July 2025, if their total super balance (TSB) goes beyond $3 million by the conclusion of that income year, which is 30 June.

For instance, should an individual’s TSB on 30 June 2026, surpass $3 million, they will be liable for the 15% additional tax on calculated earnings that exceed $3 million (as detailed below) for the 2026 fiscal year. This approach allows individuals to determine their responsibility for the 15% additional tax by referencing their TSB at the end of each income year, commencing from 30 June 2026.

Calculating TSB for Individuals Under the Government’s Proposal

Earnings are determined by the difference in a person’s Total Superannuation Balance (TSB) at the beginning and close of the fiscal year, taking into account any contributions and withdrawals made during that time frame.

It’s crucial to note that a person’s TSB encompasses all their superannuation assets, rather than being calculated separately for each individual asset. This implies that the $3 million cap is set for each person as a whole, not for each separate account or fund they may have.

To reduce the effect on most members who won’t be affected and to avoid costly and major changes to systems, the government plans to stick with the current reporting rules for funds. Given that funds usually do not report or compute taxable earnings at the level of individual members, the suggested approach introduces an alternative method for assessing taxable earnings for those individuals who are affected.

The ‘Catch-Up’ Concession

The ‘catch-up’ provision lets you use any leftover concessional contribution limits from the past five income years, beginning with the 2019 income year. To leverage the ‘catch-up’ concession within a given income year, like the 2023 income year, the individual’s Total Superannuation Balance (TSB) must not surpass $500,000 on the 30 June in the immediately preceding income year, such as 30 June 2022.

Such provisions highlight the government’s intention to optimise superannuation tax concessions and facilitate tailored contributions for individuals. This ‘catch-up’ approach, coupled with the specified TSB threshold, aims to strike a balance between offering advantageous concessions and preventing excessive accumulation within the superannuation system.

Non-Concessional Contributions Cap (under the ‘Bring-Forward Rule’)

To qualify for a non-concessional contributions cap in a given financial year (such as 2023–24), an individual’s total super balance (TSB) must be less than the general transfer balance cap as of June 30 of the previous financial year (for example, on 30 June 2023).

Implementing the $3 Million Total Super Balance Threshold

As outlined in the government’s proposal, the $3 million Total Super Balance (TSB) threshold is planned to be implemented as follows:

Unindexed Threshold

The $3 million Total Super Balance (TSB) threshold, as proposed by the government, will not be subject to indexing. This method is consistent with other superannuation thresholds, like the $250,000 level that starts the 15% Division 293 tax on concessional contributions, as pointed out in the Treasury discussion document.

Individual-Specific Application

The $3 million TSB threshold will be applied on an individual basis. This means that the threshold will not be shared among spouses, family members, or individuals who have interests in the same Self-Managed Superannuation Fund (SMSF).

Interplay with Transfer Balance Cap

Individuals initiating one or more retirement phase pensions need to monitor the following:

TSB Monitoring

Check if your TSB, inclusive of pension value(s), exceeds $3 million on 30 June of each income year, starting from the 2026 income year.

Transfer Balance Cap Consideration

Be mindful of whether you surpass your personalised transfer balance cap at any given point. Notably, when an individual commences a retirement phase pension, the pension’s initial value counts towards their transfer balance cap. Subsequent increases in the pension’s value after commencement are disregarded and do not contribute to the individual’s transfer balance cap.

Case Study: Application of the $3 Million TSB Threshold

Consider the scenario of Alex and Emma, who possess the subsequent superannuation interests as of 30 June 2026:

Alex holds an accumulation interest in an SMSF with a value of $1.8 million (and possesses no other interests).

Emma’s superannuation interests encompass the following accumulation and pension elements:

A retirement phase pension interest in the SMSF valued at $1 million.

An accumulation interest in the SMSF valued at $1.8 million.

Emma also holds a retirement phase pension interest in an APRA-regulated fund with a value of $700,000.

Chart showing Alex and Emma's superannuation interests as of June 30, 2026. Alex has $1.8M in an SMSF. Emma has $1M in a retirement pension, $1.8M in an SMSF, and $700K in an APRA fund. The chart explores their standing in relation to a $3M TSB Threshold.

Is Alex liable for the 15% additional tax in the 2026 income year?

No, Alex won’t have to pay the suggested extra 15% tax for the 2026 income year, as his TSB on 30 June 2026, stays under $3 million.

Is Emma liable for the 15% additional tax in the 2026 income year?

Yes, Emma is likely to be subject to the 15% additional tax for the 2026 income year. Given that Emma’s TSB on 30 June 2026, totals $3.5 million (calculated as $1 million + $1.8 million + $700,000), she surpasses the $3 million threshold and will consequently incur the 15% additional tax liability.

Handling Losses in a Financial Year

In cases where negative earnings are calculated for a particular financial year, these losses can be carried forward and applied to decrease the tax liability in the following years.

Impact on Defined Benefit Accounts

The Government’s objective is to ensure just and impartial treatment for defined benefit interests. To achieve this, the Treasury will undertake consultations to identify the suitable strategy for addressing defined benefit interests.

Impact on Retirement Phase Balances

While the initial media announcement emphasised earnings during the accumulation phase, the subsequently released comprehensive fact sheet clarifies that earnings liable for the additional tax will be determined by comparing an individual’s ending and beginning Total Superannuation Balances (TSBs).

Next Step is to Contact TMS Financials

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Disclaimer

This outline is for general information only and not as legal, tax or accounting advice. It may not be accurate, complete or current. It is not official and not from a government institution. Always consult a qualified professional for specific advice tailored to your unique circumstances.

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