New additional 15% tax on Super Balance over $3 million

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Starting 1 July 2025, the Australian government will introduce an extra 15% tax on superannuation balances exceeding $3 million. This move aims to limit tax benefits for those with high super balances. If your total superannuation balance is over this limit or you expect it to exceed this amount in the future, you need to understand how this change might affect your super fund and overall financial planning.

Tax on Super Balances over $3 million

The government aims to limit tax benefits for super fund members with balances exceeding $3 million. Division 296 introduces an additional 15% tax on investment earnings for these higher balances, impacting both concessional and non-concessional contributions.

The $3 million threshold is determined by the Adjusted Total Super Balance (ATSB), which considers the market value of assets. The ATSB calculation includes earnings apportionment and allows for the carry forward of negative earnings to future financial years. This tax liability can be paid either personally or from the super fund.

How the new rules affect Super balances over $3 million

The Adjusted Total Super Balance (ATSB) determines if your super balance exceeds the $3 million threshold. The ATSB includes all your super interests, considering concessional contributions, non-concessional contributions, withdrawals, and specific exclusions during the financial year. The Australian Taxation Office (ATO) assesses the market value of assets, affecting super funds with property or speculative assets due to market fluctuations.

For Division 296, the ATSB calculation includes changes in opening and closing balances, contributions, withdrawals, and unrealised gains or losses. Earnings over the $3 million threshold are subject to an extra 15% tax, in addition to the standard 15% on super fund earnings, making an effective tax rate of 30%. Negative earnings can be carried forward to future financial years, reducing future Division 296 tax liabilities. This allows for some relief from the additional tax burden.

You have flexible options for paying the Division 296 tax liability. You can pay the tax personally or have it deducted from your super fund. If you have multiple super funds, you can choose which fund will cover the tax. Understanding these new rules and terms like ‘concessional contributions cap’, ‘excess contributions’, ‘before tax contributions’, ‘after tax contributions’, and ‘the carry forward rule’ will help you manage your super balance and tax obligations better. Be mindful of the general transfer balance cap and how it affects your retirement income stream, especially with defined benefit funds and pension accounts.

Key elements of the proposed new tax framework for Super Balances

Tax rate

For super balances above $3 million, a 30% concessional tax rate will apply to future earnings. Division 296 imposes an additional 15% tax, bringing the total effective tax rate to 30%. This change aims to limit tax concessions for those with high super balances, ensuring a fairer tax system over time.

Tax liability

Superannuation funds will still pay a 15% tax on their earnings. However, individual members will now face an extra 15% tax on the earnings of their super accounts. This additional tax, enforced by the Australian Taxation Office (ATO), is separate from regular income tax and will be applied directly to the individual members, not the superannuation fund.

Earnings calculation

Earnings will be calculated based on the changes in your total superannuation balance from the start to the end of the financial year. This includes adjustments for withdrawals, concessional contributions, non-concessional contributions, and specific exclusions. The calculation will capture unrealised capital gains and losses, as your total super balance accounts for both. Understanding this process, along with terms like ‘general transfer balance cap’, ‘carry forward rule’, and ‘excess contributions’, will help you manage your superannuation fund effectively under the new regulations.

Tax payment

Individuals can either pay the additional tax themselves or have it deducted from their superannuation funds. Those with multiple super funds can choose which fund will cover the tax liability.

Impact on individuals and revenue generation

Less than 0.5% of superannuation account holders are expected to be affected, with an estimated $2 billion in revenue generated during the initial full financial year. Since the $3 million threshold is not indexed, more individuals are likely to exceed this limit over time.

No limit on super balances

There is no proposed cap on superannuation balances, but the additional tax applies only to earnings from the portion of an individual’s super balance that exceeds $3 million. As the threshold is not indexed, more people are expected to surpass this limit in the future. Understanding terms like ‘concessional contributions cap’, ‘excess contributions’, ‘carry forward rule’, and ‘general transfer balance cap’ will help you navigate these changes and manage your super balance effectively.

Adjusting your super strategy for new tax regulations

Superannuation remains a popular investment strategy for many Australians due to its favourable tax treatment. However, if you have higher super balances, it’s important to understand the impact of the Division 296 tax. This tax on unrealised gains could make long-term investments, such as property, less appealing, as you might end up paying tax on value increases that never materialise upon sale.

The Division 296 tax will require more frequent and detailed asset valuations, adding an administrative burden to managing your super fund. You will need to weigh this burden against the tax benefits provided by superannuation, considering factors such as the concessional contributions cap, non-concessional contributions cap, and the carry forward rule.

Adjusting your superannuation strategy might involve reviewing your concessional and non-concessional contributions, understanding the general transfer balance cap, and planning around the total superannuation balance. Personal contributions, salary sacrifice, and voluntary contributions can all play a role in how you manage your super accounts.

You may want to consider getting personal financial advice to navigate these changes effectively and ensure that your super fund continues to work towards your retirement goals while staying compliant with the new regulations.

Concessional and non-concessional contribution caps additional information

Concessional contribution cap

For the 2024/25 financial year, the concessional contribution cap is set at $30,000 annually, covering all before-tax contributions such as employer contributions, salary sacrifice arrangements, and personal contributions claimed as a tax deduction. These contributions are taxed at a concessional rate of 15% if your taxable income is below $250,000 per year, and at 30% if it exceeds $250,000. Managing your super contributions effectively is essential to avoid excess concessional contributions and additional taxes.

Additionally, factors like the general transfer balance cap, non-concessional contributions cap, and bring forward rule should be considered to optimise your retirement savings. Keeping track of your total superannuation balance and planning contributions, including salary sacrifice and voluntary contributions, can help you take full advantage of tax benefits while staying within allowable limits.

Carrying forward unused concessional contributions

If you don’t reach the before-tax contribution cap in a given year, the carry forward rule allows you to carry over the unused portion to future financial years. This rule applies to concessional contributions and permits you to carry forward unused caps for up to five years, provided your total superannuation balance is less than $500,000 as of 30 June of the previous year. For instance, if your total before-tax contributions were $20,000 last year, you can carry forward the remaining $10,000 of the cap to the current year, enabling you to contribute up to $40,000 before tax without incurring extra tax. This is different from the bring forward rule, which only applies to non-concessional contributions.

Always consider seeking personal financial advice to align your superannuation strategy with the latest regulations and your financial goals.

Non-concessional contributions cap

For the 2024/25 financial year, the non-concessional contributions cap is set at $120,000 per year, with the option to contribute up to $360,000 over three years under certain conditions. These voluntary contributions are not claimed as a tax deduction and enter your super fund tax-free, provided your total super balance is under $1.9 million. Contributions from your spouse to your super account and transfers from foreign super funds also fall under this cap.

Using the bring forward rule for non-concessional contributions

The bring forward rule allows you to use future non-concessional contributions caps in the current year. If you are under 75 at the start of the financial year, you can bring forward the next two years’ caps, allowing contributions of up to $360,000 in one year without penalties. This rule reduces your contribution limits for the following years but helps avoid penalties as long as the total contributions over three consecutive years average to $120,000 per year.

Understanding these rules can help optimise your super strategy, ensuring you stay within contribution caps and make the most of tax benefits. Consider your total super balance, potential spouse contributions, and foreign super fund transfers when planning your contributions. Seek personal financial advice to align your strategy with current regulations and your financial goals.

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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.