10 revelations about the new $3 million super tax

Super contributions are taxed at 15%….tax withdrawals from accounts remaining above $3 million at the individuals marginal tax rate.

As I understand it, the additional tax on earnings for TFB above 3 million, can be paid from within super, or from outside super. If I pay from outside super, can I claim tax losses(eg negative gearing), outside super, against this amount? If so this is an incentive to negative gear more properties.

it is 30% ....was no cgt prior and now 30% of the capital gain not 15% ..its an extra 15% tax on income from prior .....but they are adding capital gains .so above 3m if the assets totally go up 500k and you got 6m in your fund ,you get taxed on 250k % 30% = 75k extra above the tax on the income like before .
therefore 30% extra tax on the capital gain and 15% extra tax on the gain ...right ?

With a large portfolio of fixed income (SMSF > $3m) I remember once sage advice to generally buy at par (on issue generally) to remove the capital loss risk, by holding to redemption if needed. Note a set in stone strategy, just the option.
So some fixed rate notes certainly may trade under par as interest rates rise. However if this is the case at the time of the new tax, a capital gain in earnings is captured as I hold to redemption, even though I have no life of asset capital gain! buy and sell at par can now cost depending on the interest rate cycle.
As interest rates reduce, some fixed rate notes bought as rates increase, now rise in value and again are captured, and a loss possibly generated returning to par later. Sure, that would reduce the assessable "earnings" however it then becomes a wait and see if that is advantageous.
A bit in the detail isn't there!

Is this new system but a way to provide thousands of additional tax agent jobs for the thousands of (previously employed) financial planners?

Maybe I am not understanding all of this correctly, but taxing unrealised gains only sort of goes against the principle of double entry accounting. If you can tax unrealised gains, surely to balance the books you must also be allowed to make a claim for unrealised losses. Also seems to me that we have now introduced a "dual" system where unrealised gains in super are taxed, but unrealised gains outside of super are not. Where is the logic in that. Honestly sounds like a mess waiting to happen.

Land tax is on unrealised gains. Unrealised losses are carried forward to us against future gain

The title "not double of tax" is correct rather it's a tripling of the effective tax rate on capital gains on assets over the $3M threshold......30% versus 10%. This is higher CGT (that TOP MTR) outside of super.

The big impact will be seen on what members are required to do prior to year-end (i.e. sell these assets to pay either for expected tax hike or harvest loses to limit the impact on the unrealised capital gains component). This is simply a disaster for effective management of an investment strategy as you'll continuously have liquidity calls. Worst policy direction ever based on the nonsense proposition "lifetime government support" is accrued by highest income earners. There is simply no correlation to this political statement and the reality of who holds the biggest super balances.

People will just leave the system as NO ONE PAYS the assumed TOP MTR this tax concession is based on EVER. They will either gift it to family, renovate or invest it directly or via trust and never sell so never pay tax.

This is no upside to government collections from this politically motivated policy. SCRAP it and be rational (and politically brave) by tax the pension side of thh retirement pool.

It's not 30% though in real terms.

I don't think average Australia is too interested in whether someone with over $3 Million in super decides to pull it out and invest/gift it are they?

The major criticism should be that the proposal doesn’t deal with the problem- very large balances of $50-$100m left at 15% by the Libs. The solution is to retain the current tax structure on earnings but with a progressive rate structure, albeit not easy to set what is fair.

In the interest of full disclosure, I (we) have a pension card, an SMSF and a Million dollar house (which cost approx $100,000 in 1983). My SMSF provides most of my income, but I would be slightly better off on a full pension due to some non income producing assets (but that is another story). I resent the often espoused theories that those of us on pensions (or on less than the "rich" list) haven't worked hard, or spent rather than saved for our retirement. I ran a business for 46 years and worked 6 days a week and, more often, 12 hour days and my performance in business was marginalised more by what Governments (of all descriptions) put on us than by any market forces.
That being said, I really don't care, one way or the other, that the Government is trying to keep a lid on high balances in Superfunds - perhaps it is necessary - I don't know - above my pay grade!.
What concerns me is what I read into the way the Government has decided to do it. Whilst touted to be a simple fix it is obviously far more complicated when you drill down as has been discussed by the far more savvy people, than I, above.
My feeling is that this is a "feeler" they are putting out to test the waters, perhaps knowing that most people won't object as it is only applies to the rich and they are on safe ground. To my way of thinking, in time when we have moved onto other issues and accepted our fate, it opens the way to make all Superannuation Funds (and maybe other savings) subject to tax on unrealised capital gains, year on year. Otherwise, why would they invent such a convoluted method of taxation when, as many have suggested, they could simply increase the tax on income over a particular threshold - job done (quote) "simples"!
Another thing that worries me is that the proposed definition of what Super is for screams to me that they will introduce some lump sum withdrawal changes. Otherwise, why have such a limited definition in the first place ("to preserve savings to deliver income for a dignified retirement etc. etc.") featuring "preserve savings" and "income".
My Super is most of my assets (other than house) and I fully intend to see that my children (who struggle) will get some of it when I die, or sooner, if it is needed. I did actually scrimp and save to create my super and it was entirely with leaving as much to the children as possible as a fundamental incentive and there was no suggestion at the time that there was anything wrong with that ideology! I hope that any future changes will take into account that most of us acted according to the rules and sentiments of the time and don't restrict us from withdrawing lump sums (of any volume) to pay for things including major repairs and renovations (if needed to expand to house children's families etc), costly medical procedures that will soon be upon us, or simply to help out our children (whether by gift or loan).
In short, leave us alone to fulfil the destiny that was fair and reasonable at the time we set off on this superannuation journey - rules invented for "equitable" reasons often become "inequitable" to those who were thought to be the victims in the first place.
Again, for full disclosure, this is the first time I have ever entered a discussion of this sort and these are merely my fears about Superannuation's future, not a treatise on how to fix the issue so please be kind to this old fool!

Hi Michael Well said and dito dito.

Does this new calculation method (on unrealized capital gains) also apply to SMSF's in pension phase ?
Sorry if i messed that point, but I did search for it to no avail.
The article/comments make it clear it does apply to Accumulation phase.
Thanks

Hi D, yes, it applies to all super balances, pension and accumulation, over the $3 million threshold.

Thanks G.H.
Doesn't taxing an un-realized capital gain fly in the face of accounting principles that have been in vogue since forever or maybe even longer ?
I am not an accountant, but I was raised/educated to believe that a capital gain doesn't exist until the item is sold.

"capital gain doesn't exist until the item is sold":

Plenty count their 'market-to-market' (current) unrealised capital losses and gains.

Problem for ATO is plenty do not have enough cash to pay whatever tax on unrealised gains - forcing a sale.

Also ATO might not have enough cash to refund negative tax on unrealised losses leaving the losers to carry forward unrealised losses - but not carry forward unrealised gains.

All this debate highlights the danger of important decisions made in the absence of a longer-term longevity strategy. Super is just one of the issues. Others include the fairness of the taxation system, the lack of indexation of pensions to increasing lifespans, no incentive for older people to continue paid work (but investment in immigration). The health system is staggering under the cost implications, while we invest little in preventive health. There is inadequate support for people over 65 who cannot care for themselves. We spray money towards a groaning aged care system which can’t spend it because there aren’t enough trained workers at all levels.
It's a bit late for instant fixes but if we want to avoid repetitions of this latest drama a National Longevity Strategy would provide the framework. Perhaps the large super funds should get this process going – it seems too hard for the politicians and their silo-contained bureaucrats.

This topic certainly has kicked the hornets’ nest!

To me the takeaway feels much simpler: the govt is inadvertently putting a limit on super. They are making the administrative burden high (particularly for SMSFs with non market traded assets) so those impacted will take their assets out of the super system and bring it back to the personal tax system (where you are not tax on unrealised gains). They estimate the incremental amount above $3m will not be ‘consumed’ (and therefore GCT never crystallised) in retirement so force it out of the retirement ecosystem.

In much the same way people decry an increase in marginal tax rates disincentivises the hard working worker / entrepreneur to keep working harder (dubious), such a low tax rate in super disincentivises the retiree from spending, donating or passing asset onto younger generations. The govt wants this money in the economy, not sitting in a 75 year olds account compounding at 10% p.a. at low tax rates with no real end goal (apart from inheritance).

When you boil it down to purpose, I believe the intention becomes much clearer. The argument could be “why don’t they just limit super balances?” But just look at the uproar this tinkering has created….

David James,

Some good points there, but one thing I don't think is correct is your comment that "they are making the administrative burden high (particularly for SMSFs ....)". This move doesn't add any administration. The ATO will do all of that. The ATO will contact individual personal income tax payers and tell them "you're total super balance was over $3mn at year end and during the year it increased by a net $X. You therefore owe 15% of $X as tax so pay up now."

I suspect you're right about folks taking funds above $3mn out, but this is a strategic burden not an administrative one. Let me give an example.

When to take the funds over $3mn out. Well, you have to do this more than a year before you get to $3mn and even then it mightn't work out. Why? Because let's say you have $2.5 mn in May 2025. That will end up being over $3mn as at 30 June 2026 if it grows by $501,000 i.e. 20.4%. So you might think you're OK, but if the share market has a boomer of a year it could easily happen and you'll be caught. You'll hear from the ATO in late 2026. (By which time the market may have pulled back and you have less than $3mn then!!!!)

So does that mean that everyone with $2.5 mn or more will take funds out? It's an individual call. But the need to think like this shows one of the weaknesses in the implementation structure.

Not sure what you mean by your comment that the government wants money 'in the economy' not sitting in a 75 year old person's account. If money is taken out of super but still invests in the same sort of assets, then that makes no difference to the economy. I don't think that is part of the goal at all.

Good points SMSF. Re the complexity I was thinking of valuing private assets - but I think that is already an annual requirement. You are right, it is increased risk which entails higher tax = strategic decisions need to be made.

Re your / my last point about 'money in the economy' - the change in incentives (likely increasing the marginal income tax rate from 15% to 45% as money moves out of super into personal), people will be more inclinded to spend, donate, give money than save. "I was thinking about buying more full franked dividends because it is so attractive, but now I'll just buy that caravan and landcruiser and head around Australia. Might also fly my kids and grandkids to Perth to meet us over there". That is the incentive I think will drive increased comsumer spending from this change.

Thanks for having a civil conversation!

Hi Jack, on your question: "How are the Super Fund investments that exceed the $3m be identified and by who Trustees or ATO."
This is explained in the article, the ATO keeps a record of everyone's super. Yes, only people with over $3m at EOFY will pay this new tax (on unrealised gains).

There is, of course, a simple tax avoidance solution to all this. Simple: don't have more than 3 million in your super. And BTW, people with less than 3 million in their super -- and some substantially less-- still worked just as hard. In particular, there is a large cohort who did not have super paid by their employees when they started work. Women were especially disadvantaged due to lower salaries compared to men and many required to resign if they married or became pregnant and then, of course, they stayed home to care for children. No child care back then unless you could afford a nanny. Consequently, the ability of today's "older" Australians to accumulate 3 million plus in their super accounts has not been not as easy as the "younger" generation of workers who have enjoyed 9.5% employer super contributions.

Thanks Graham for the article which was clear and informative.
Unfortunately a large percentage of the population are non-accountants and will simply believe the government's "simple" and "modest" claims. It is similar in my view to the franking credits plan where Bill Shorten claimed that the refund of franking credits was a rort when in actual fact the return of franking credits is a recognition of tax already paid but ultimately not due.
Much of this is too complicated for most - especially in a short news cycle.

The method to imply additional Tax is based on Valuation ?
For members under 60 and over $ 3 million in balance just have to Cop it as they are unable to withdraw ?
For members above 60 in Pension or Accumulation or on both have choice to keep total valuation end of year less than $ 3 million.This will indeed change member's strategy of where the fund is invested ,Contribution and Estate Planning.
All aspects of your life planning will need to be addressed.
The focus needs to "Rearrange your Supper way before 2026"and keep it simple.

To introduce a change like this then they should be adding a new clause to the conditions of early release.

If a fund member has attained a TSB greater than $3M prior to preservation age, then the fund member can withdraw those amounts over $3M if they choose.

It would likely be taxed like all other early release options but the option should at least be there.

By using this simplistic formula, this new tax is another robodebt waiting to happen...

That's a heartless comment - I suggest you read up on the robodebt royal commission.
The super millionaires that will be impacted by these changes have an army of tax professionals to protect their assets. The victims of the unlawful robodebt policy that tragically committed suicide after being pursued for welfare debts that never existed never had the means to access equivalent assistance.

Sir
you wanted to know 30% of what
It is 30% of unrealised capital Gains and actual income IF YOUR TSB is over $3m.
(Yes before this proposal it was 15%)
AND IT IS DOUBLE TAXATION
because if TSB is over $3m then capital gains are taxed 2 times once at fund level and second at personal level.

Hi umesh, that is incorrect, as my article explains. It is not a 30% tax on unrealised gains, it is 15%, and it is only on the proportion over $3m.

Graham How are the Super Fund investments that exceed the $3m be identified and by who Trustees or ATO. Once selected are they the only investments that the tax on unrealised Capital Gains will be applied.
Thanks Jack

Beware of a Cap on withdrawals. Depending on your age/ health and financial needs, removing funds from Super well prior to 2025 well worth considering

I've been aware a Cap on withdrawals has been coming for a few years now.

Being saying it on different forums, articles on Superannuation.

Some are only just realising it is inevitable.

Raising of preservation age and compulsory Super Pensions or Annuities are coming as well.

Could you provide evidence - other than that which you've created by your comments - of this?
I can see how the purpose of super statement might be interpreted that way (if it's for income then that's all you withdraw) but for both sides of politics, going as far as you are claiming would be suicide. So I'm wondering things like, where has a politician or senior bureaucrat said anything to give you reason to issue such a confident warning?
Without that I think you're just grandstanding or fear-mongering.

"Raising of preservation age and compulsory Super Pensions or Annuities are coming as well."

Facts or credible information please, not scaremongering speculation!

Past legislation changes to limit access our Super, extrapolating from the income Statement for purpose of Super and simple maths of coming problems for Super in the next 10 to 15 years as the last of the Baby Boomers and GenX reach preservation age and retirement age..

Past changes that limit our access are, you once could start a super pension from any age. This was stopped

You once, if leaving the country permanently you could take your Super with you, now it must remain here until at least preservation age.

You could once start a TTR at 55 now you have to be 60.

We are an ageing population and demands in aged pensions will increase. We have more older people being supported by less workers.
As a large number of Baby Boomers and GenX start taking their Super out to pay down mortgages and otherwise spend their Superannuation money then go on the pension will add costs to the government and create liquidity issues for Super Funds. They don't have the cash sitting idle waiting to pay lump sums to people.

It's not grandstanding or anything other than realising there are coming headwinds to both the aged pension and Superannuation industry.

Of the two, I think limits on lump sum withdrawals will come first.

On average we are living longer but limits in lump sum withdrawals would delay needing to raise preservation age in any hurry.

@Mark. So no facts or credible information, just your considered opinion and speculation. Thanks. Better I think to deal with announced proposed legislation or actual changed legislation to consider actions to be taken. "Worry" once when something happens, rather than jump at shadows beforehand!

I agree with James. You're extrapolating way too far there Mark. Sure there have been rule changes about access, but all have been in an appropriate direction to tie access with actually being of retirement age. They're not restricting access to address a budget issue the way this tax change is being pitched.

I wouldn't say it was impossible for a politician in the future to think about preventing lump sum withdrawals, but that would face a massive legal challenge and the political fallout would be disastrous. So I'd say it's highly unlikely. Not something to start planning a super investment strategy around.

How could a legal challenge to compulsory pensions or Annuities in the future possibly succeed?

Purpose of compulsory Superannuation was to provide people with the ability to fund or part fund their retirement.

Generous tax concessions were offered to do this.

There are a number of early release clauses that allow people to access money early for non retirement purposes but they pay an additional tax on withdrawals.

Superfunds and Parliament are both aware of the issues that are going to occur as Baby Boomers and GenX start taking money out of the system.

There is no point worrying about it as our money is locked up and we can do nothing about any legislation changes to Superannuation.

I doubt that when it occurs, not if, that lump sum withdrawals will be completely stopped however % of balance limits will likely apply.

Ageing demographics will force the government to make us make our Superannuation last.

Whether you believe it is going to happen or not is no skin off my nose, it is going to happen because it has to happen.

What MIGHT happen with housing is people with property over $X value will be required to use the government equity scheme or reverse mortgage to help fund their retirement prior to elegibility for aged pension.

Hi Heather, on your question "Do you think that compulsory minimum pension withdrawals count as withdrawals?" Yes. The only calculation statement we have is a short Fact Sheet but I'm confident minimum pension withdrawals will be included. The reason they intend to add withdrawals and subtract contributions is so the tax is on 'earnings' such as income and capital gain, but not including contributions made or withdrawals taken out. For example, if someone contributed $100,000 in after-tax dollars, it would be unfair to tax it under this new tax, so the amount is deducted from the calculation.

Great summary Graham. It occurs to me that this tax is actually a completely new Super Capital Growth Tax, levied at 15% of fund growth above the $3M cap. Obviously fund growth includes the value of capital asset growth without any discounts and includes franking credits that are an asset to be returned in one form or another. This tax has nothing to do with earnings or taxes on those earnings aside from the fact that they grow the capital value of the fund.

Hi Mark B, yes a new type of levy/tax/surcharge. I'm thinking that when they decide on a name, it should be something like the 'super surcharge' to show it has nothing to do with normal meaning of taxable income or earnings.

Many thanks for your article Graham. For reasons you clearly enunciate and because the new 15% was levied on an amount that bore no relation to the conventional income measure, I too labelled it a “surcharge”. It was hastily conceived to raise a sum of money from wealthy individuals without regard for fairness and implementation challenges.

Hi Graham, they’ve already used the ‘Super Surcharge’ name so will need something new. The old Super Surcharge was levied on high income member’s contributions and abolished in 2005. Maybe we need a competition to give it a name?

How about Labor’s new “Super Growth Tax”?
To eventually penalise the growth of a growing number of Super Funds.

Graham
I am wondering about the treatment of franking credits, which are not mentioned in the Treasury work sheet examples.
Will the TSB be calculated after franking credits have been deducted or before. To illustrate the problem my franking credit refund might reduce my TSB below the $3 million limit if calculated at the 15% rate. However if I am slightly above the $3 billion TSB before the franking credit refund, does the extra 15% tax apply. If so it reduces the value of the franking credit.

More fundamentally can you deduct total franking credits earnt on a balance above $3 million from the earnings in the fund below $3 million. Or will you lose a proportion of franking credits equal to the proportion of your super that is above the $3 million cap.

This is not advice, but your franking credit refund increases your TSB.

If you are in an SMSF, your year-end super balance will almost certainly include a sundry debtor for the franking credits which are due to be refunded. This effectively increases your year end balance as it is an asset.

Thank you for the sterling analysis Graham.

Centrelink uses deeming rates so they don't have this nightmare for pensioners. Why can't they do the same here?

Now that the franking credits are under attack, maybe now the Boomer generation will get upset enough to care...

I have a question on the formula. If the calculation is EOFY balance minus SOFY balance minus contributions plus withdrawals, it implies that you cannot withdraw money in that financial year to avoid breaching the $3m cap. Is that correct?

Hi Rick, I can see why you think it would work that way, and you might be correct, but I take a different view. This new tax is only payable by individuals who hold over $3 million in TSB at the EOFY. By withdrawing money to stay below $3 million, this first test fails. It is only after passing this test that the calculation becomes relevant. Hopefully, this will be clarified before Q426.

Graham,
Do you think that compulsory minimum pension withdrawals count as withdrawals? If so, my pension will be taxed. Why is no one talking about this aspect of Chalmers’ ludicrous proposed tax? Heather J

Which Treasury boffin devised this botch? Could it be the same person who did in Labor with the no refund franking credit proposal?

I’m a little concerned with the situation of an asset, say purchased in 2020 which has fallen in value prior to 30/6/25. So it has an unrealised capital loss. If in 2026 it goes up in value but is still below its original cost, the new tax will apply (proportionately) to the increase in value. That is totally unfair. (Assumes fund value over $3m at relevant time)

Hi Graham. Thanks for the clarification about the 'new 30% tax' that is in reality an 'X + Y' tax.

A query. Under point 1 you state:
'In another sign that the policy was rushed, the complexities of Defined Benefit super schemes are not addressed. Many of these arrangements do not define an amount in super. Someone may expect to retire on $100,000 a year but they do not have a TSB.'
Can you please check this with the ATO website on capped defined benefit income streams.

A typical defined benefit pension may have no asset value, so a workaround is used.
For a typical defined benefit scheme, the amount relevant to the transfer balance account is worked out by annualizing the first payment a person receives (or using the balance as at 1/7/17 if started prior to this date) and multiplying it by 16 to calculate the special value.
In your example, when a person who starts a capped defined benefit pension with an annualized figure of $100,000, this amount is multiplied by 16 to give a special value of $1.6m.
If their personal transfer balance cap is $1.7m and they have other funds in super, they can only commence an income stream with a maximum of $100,000.
This transfer balance account value ($1.6m in this example) is not modified when calculating the retirement phase value of your superannuation interests.
So, as a general rule, if a person commences a defined benefit pension after 1/7/17 with $100,000 pa, this counts as $1.6m towards their total super balance. This defined benefit pension may rise with indexation to say $110,000 pa, but the amount used for the person's transfer balance account and total super balance will remain at $100,000 x 16.

Hi James, thanks for your point. Not pretending to be an expert in the arcane world of DB, but Treasury has not decided how to treat DB in the new scheme. In your example, for TSB purposes, the calculation always remains at $1.6 million whereas the DB pension rises, which is a favourable position versus someone whose TSB is rising due to unrealised gains, with increasing amounts subject to the new tax. This will need addressing.

Hi Graham. If a public servant retires on an indexed pension in excess of $187,500 pa, then they may be affected by the proposed rules. $187,500 x 16 = the special value of $3,000,000 for the transfer balance cap and the total super balance. This value is only reported once to the ATO, so it generally doesn't change. It will need addressing, but it may be put into the 'too hard basket'.

Graham,
In the last edition of Firstlinks you wrote..
'Until the next election, Dutton will argue the changes are unacceptable, supported by the Murdoch media'
Well it now sounds like they were entirely correct to question this cohort of new taxes, sold to the voting public as bringing fairness to the system, but in fact bringing great intergenerational unfairness to the same younger Australian taxpayers they are supposedly helping.

Hi Graham, We are Morningstar subscribers and read the Firstlinks Articles with much interest.

However, even though we have an SMSF now (after many years of being in retail/industry funds) I would like to understand how/if industry and retail funds will also be impacted by the legislated changes which have everyone talking?

At first glance, it seems to be targetted at SMSF's, or is that only because SMSF's are assumed to have the largest TSB's?

And, if it is to also apply to industry/retail funds, how on earth will they calculate a member's TSB where funds can be invested in a huge range of assets, listed and unlisted, including large commercial properties etc?

I'm assuming that asset valuations in these large funds can certainly be managed much more creatively than a SMSF which is invested in mainstream assets of property/shares/bonds/cash etc. I get a real sniff of "red" here, rather than all Australians supporting our country in an equitable manner.

I do worry what the impact will be on hard working business owners who have set up their SMSF and purchased perhaps a commercial property to run their business from, employing staff etc. and then find that an asset which does not in itself generate income becomes taxable as an unrealised gain. It does not take much for a commercial property to go over those sorts of figures, depending on what else is in their SMSF.

Would you be able to do an article which responds to some of these issues around the points I have raised above? We have children in industry funds, albeit with small balances, but watch out for the indexation sting!

Keep up the good work

Hi JL, Thanks for your question.

There is nothing in the new super tax proposal that is specific to SMSFs. It will be measured based on Total Super Balances. Anyone with an industry fund, a retail fund and an SMSF will add up their balances in all three funds to determine a total. Where you ask: “how on earth will they calculate a member's TSB where funds can be invested in a huge range of assets, listed and unlisted, including large commercial properties etc?”

There is nothing new about this rule when it comes to valuing the assets in a retail or industry fund. They do that every day now to calculate the unit price. Anyone can go on their websites and know their balance.

Whether these numbers are ‘accurate’ is the subject of a major debate which we have covered many times on Firstlinks, such as this from a couple of weeks ago. Clearly, the large funds argue their valuations are accurate:

https://www.firstlinks.com.au/not-all-private-markets-volatility-laundering

Thank for the article idea but I think we’ve covered these issues in articles over the last month.

Graham, 1) Your Point 8 above re a "loss" and no c/forward losses is bit I find astonishingly not thought through by Treasury and unless improved upon can't imagine bill will get through Senate. As an eg. of how long can take to recover from a GFC - type happening, a quality overseas pre-GFC acquisition in 2002 took until 2014 to recover after GFC to sell at acquisition cost to recover capital, due to difference of exchange rates at disposal it incurred a 'paper loss', reinvested locally and took 7 . 5yrs to utilise the loss by careful trading.

2) if unrealised gains are taxed p.a. as proposed, assume there's always gain years for ease of example, when an asset is actually disposed of will cost base of asset have the p.a. earnings tax already paid added to its cost base thus increasing cost base & lowering actual capital gain at time of sale, or will the p.a. taxes paid on it be forgotten and no allowance made against cost base?

1. OK. So a big loss is experienced in year 1. This loss gets carried forward. If it takes so long for the asset price to recover then the loss experience that is carried forward will mean this tax will not apply for a very long time. Winning!

2. No. This is not an income income tax liability. Nor is it a liability to the fund. Its a separate tax. Does Div 293 tax get added back when super is cashed or assets sold? No. So why would this?

Re: #1 So what happens to the tax paid previously when the fund never goes above $3m again? The tax office keeps it!
Also, the tax paid on the unrealised capital gain is worth a lot more in real terms at collection under this method than it would in real terms when the asset is eventually sold.. That's the whole point of CGT on realised earnings on the sale end of the ownership. You could never afford to purchase like for like ever again with the tax office taking a share of the unrealused gain along the way.
Plus, what will happen when the asset is actually sold in terms of cgt. Will the property be double cg taxed?
Taxy, you seem to work for treasury or the ato, and are not understanding the difficult or even untenable situation this places some people into.
What will happen to the tax credit please if the fund never goes above $3m again? And what will happen with CGT at the end of the ownership please?

ATO already have the tools to calculate tax for individuals with multiple jobs (one declaration to claim tax-free threshold, PAYG, etc.); it wouldn't be any different for super (incl. multiple accounts), if they would introduce tiered tax rates to collect more revenue. (Incomes and expenses are already proportioned within super accounts with multiple owners, so pensioners, or people with lower balances wouldn't lose out. ATO would only need to add-up taxable super incomes instead of total balances, and issue notice (add extra line to individual notice of tax assessment), if/when applicable. No tax on unrealised gains, no big change for super funds (just select the right PAYG and tax tables), no new complexity for ATO either; equitable, fair, and (with indexation) no issues...?
(Note: As per Murphy's Laws, this sounds too simple for me, so it must be wrong! What did I miss?)

What a dogs breakfast.
Simply get rid of the centrelink assets tests etc and everyone gets the aged pension
They then remain in the taxation system including all their income whether super or not. Simpleness !!
This gives govt. enormous savings and they receive more revenue from the taxes.
Gets rid of all the bureaucracy costs associated with managing the assets and income tests.
All pay tax as normal according to the thresholds. Like done in other countries.

if I have a$5mill acct ,am in pension phase make $250000 from bonds and term deposits (ie no franking credits to confuse the issue) and take $80000 pension from pension acct and 1 mill from accumulation acct to pay for nursing home bed then at beginning of financial year I have total 5mill but at end of financial year I have $4.43 million total but this tax adds back my withdrawals of pension $80000 and $1mill for bed giving an EOFY total of $5.25 mill on which to tax 15%. is this not quasi withdrawals tax on obligatory pension and drawdowns

Nope. You're balance had only decreased due (predominantly) to your withdrawals. So, the withdrawals need to be added back in to work out what (if any) growth there was to your super balance over the course of the year. It is not a withdrawal tax. It's just mathematics.

From Graham's Ed's Note: " .. they started this conversation and conversations can be very dangerous. And then, you know, two seconds before they announced it, Anthony Albanese was telling people that they hadn't made a decision then all of a sudden, they had." [Samantha Maiden from News] ..... If there had actually been a conversation involving the super industry, these issues would have been identified immediately - that is the purpose of the conversation. The method proposed by treasury seems overly complex and unfair. Surely government and the super industry can work together develop a simpler and fairer method that achieves the same objective.

Unfair? Debateable.

Complex? On the contrary my dear Watson. It's actually pretty simple. Although there are some bugs to be ironed out.

It's not perfect but it involves some basic mathematics really.

How on earth is it fair to tax unrealised gains on only a particular part of society?

If they believe taxing unrealised gains is appropriate it should be across the board for everyone whether your assets are in your personal or super name.

Applying it to only a portion of people is the very definition of unfairness and inequality.

@Paul: "If they believe taxing unrealised gains is appropriate it should be across the board for everyone whether your assets are in your personal or super name."

Careful what you wish for! Let's hope it's contained only to larger superannuation balances! I'm sure the Treasurer would love to levy a tax on unrealised capital gains on shares portfolio and investment property over a certain value too. Albo even had to slap him down after he repeatedly refused to rule out taxing capital gains on the family home when questioned in the media! Precedents are dangerous and can quickly become the thin edge of the wage!

Paul and James,
In effect everyone who owns shares already is taxed on unrealised gains. This is because the accounting rules for companies to calculate their profit and tax liability require assets to be revalued each tax return.
So those dividends that so many of us rely on are paid out of a mix of cash profit (revenue less expenses) and mark to market profit (asset revaluation less depreciation). Of course unrealised profits might be withheld not included in the dividend, but the company still pays tax on it.

My point being that it's not quite as new as you might think. Doesn't mean it's a good way to tax super, but the argument against it can't be based in the idea that it's not done already.

I still don't like it at all

"I still don't like it at all":

And don't have to lump it because no tax payable on unrealised capital gains.
https://community.ato.gov.au/s/question/a0J9s0000001GKt/p00039097

It is not a new 15% tax on the proportion of earnings over $3M.
No one seems to be taking into account the "Proportion of Earnings" in the Tax Liability calculation.
If the end of the current financial year TSB is $6M the additional tax rate on earnings is 7.5%.
If the end of the current financial year TSB is $5M the additional tax rate on earnings is 6%.
If the end of the current financial year TSB is $4M the additional tax rate on earnings is 3.75%.
If the end of the current financial year TSB is $3,100,000 the additional tax rate on earnings is 0.484%.

Agreed. It really is negligible additional tax until you start getting into much larger balances than $3m. Everyone seems to be missing this and fixating on the 30% or 15% number.

I have an idea,
let’s have a discussion on housing, (as we have a housing crisis and getting worse), then 8 days later announce a proposed policy and let’s put a cap on what is a fair and equitable amount on the family home to house your family (like the 3 mil cap for super for retirement), let’s say $1.5 million. That’s plenty. Work out the relative increase over each relevant year and apply a 15% tax on the increase in value over the cap even though you have not sold it.
This proposed new $3 million super tax is a “wealth tax” , not income tax and I fear this new “wealth tax” is the thin edge to what may come if this absurd super proposal comes to fruition as announced.

Well, a conversation on housing policy is well overdue... Perhaps be careful what you wish for?

Thanks Taxy,
Written with Sarcasm, not a wish list but more relatable to all of us on the complex super rules and how it can be realistically expanded in the future to affect most especially those who have general apathy re retirement.

Yep, this sarcastic call does the intended job of highlighting what they are really doing. I actually support some threshold for primary residence too be included in welfare assessments (pick a number $1.0 million, $2.0 million ….?). However, it’s obvious they always had this planned but didn’t have the awareness/experience to understand how to do it….making it up as they go along using focus groups no doubt

This new tax should be called a wealth tax, nothing more, nothing less.
Will the Labor Government extend it to all taxpayers? Keep in mind there is already a significant death tax on superannuation benefits inherited by non-dependent beneficiaries.
We have had the capital gains tax for almost 40 years. It is a complex and diabolical mess of modifications.
For example, if my parents acquired an asset in 1984, willed it to me in 2016, and I dispose of it in 2024, I need to know the full acquisition cost from 1984. Consider if I pass the asset to my children and they dispose of it in 40 years' time.
So, I predict a huge reset of all asset values say on 1 July 2025 and we all pay a wealth tax on unrealised gains thereafter. Try selling that to the electorate.

Not true. CGT was only introduced in September 1985. So, for the asset acquired in 1984, you would only need the market value at the date you inherited the asset (i.e. 2016). You're welcome.

Spot on.

Agreed Taxy, lets change the facts to 1986 as the date of acquisition and what are yourthoughts now?

The discussion of CGT on non-super assets is completely irrelevant to the understanding of how this proposed new tax will work.

I agree it is a tax on the change on wealth in super, because it applies to unrealised capital gains.

Why not call it a ‘excessive savings tax’ or a ‘super perverse savings tax’ as it seems from the discussion that it is a tax on people who have deferred spending and consumption for their retirement years. In the meantime the assets in super funds have provided stable capital for the economy to function

Superannuation is now so deeply complex that most have lost trust in it due to its proven exposure to legislative change.
Those with large balances will always find ways to avoid using superannuation and thus the tax income opportunity for government will never be realised.
Meanwhile those that need a dignified retirement after years of part time work and low wages will, of course, still miss out and continue to be penalised with 15% accumulation tax inside super when their personal tax rate may well be much lower.
As usual, I think I smell a rat.

Yes. The Aust Fin Review is already advising how those with $3m plus super can minimise their tax via other vehicles, eg family trusts, incorporation etc.
What amazes me is everyone screams about our poor education, health and aged care, decaying infrastructe etc but don't seem to want to pay for these essential services. Having said that, those "wealthy" citizens will have no problem self-funding these services. There will be many Australians whose super will never reach $3m, especially women.

Hard to disagree with this sentiment Jan. There are the "have's" and the "have nots". Here, the "haves" are being asked to have a little less and their carrying on as if they were about to lose their first-born!

Taxy. Some 'haves' have no firstborn, I know 2 x single/no kids whole estates left to children/medical charities, as no children they wished to do good for others' children, charities will feel pinch eventually if this comes to pass, they will receive less. Their gratitude indescribable for whole estate for future research supporting scientists' salaries for a number of years, they explain what/how long it supports & see in action if executor visits lab. Researchers know can't be done on Govt funds alone and the 'haves' don't shout about what they do. How much of this new tax will go to medical research, little if it's to fill a red hole?

Something people forget is that to have $3m in Super you will have worked hard your working life. Earned solid income. Paid significant income tax which has supported government funded health care, public education, public infrastructure, etc. whilst likely also paid for private health care, private education (ie not used the public services their taxes have contributed to funding).

superannuation savings mean we do not require (thus save) the government from providing government funded pensions, age care and medical services and now the suggestion is we haven’t done enough and need to continue to contribute until such time as we have nothing left.

The problem in this story is, with the amount of government mismanagement of money spending, it is likely the government won’t support we when our super balances have been depleted. The ‘piggy banks’ will be bear

Governments - of all levels need to -
Stop handing out unaccountable money, spending money on endless reviews and make a difference where it counts

Some overly "entitled" comments in here... And raising money for charity? Noble. But not really the purpose of super.

Some very inconvenient truths indeed Sharon, but at the end of the day, when the well runs dry, who do you call? certainly not the people that that have benefited most from the government funded health care, public education, public infrastructure, etc. cause their well is mostly dry too and they haven’t paid enough tax.

“And then there are art collections, vintage cars, wines, NFTs … if Treasury thinks an accurate, independent value can be placed on all assets and then a tax imposed, it is creating an administrative headache.“
And there is the reason SMSFs are not worthy to be called superannuation. These are lifestyle assets, not investments no have no place in a tax advantaged portfolio.

All of which should have been outlawed years ago...

I'd love to know if Treasury and Labor knew of all these issues or not. Think of the implications if neither knew, but most experts in the super industry could come up with most of this list within a day or so. Or what if Treasury knew but didn't tell the Government. And if they both knew, does that mean they both agree with taxing unrealised gains, and were OK with a policy that may have to exempt their own defined benefit super?
I know now the plan is to find a way to include defined benefits, but the initial answer was the Government didn't know if these could be included.

Given the article's (helpfully) extensive use of formulae to hammer home the point, I suggest another one: Ideology x Inexperience = Ineptitude I suspect that the govt will, unusually, listen to all the consultation they receive on this one and water down the original proposal, or otherwise find a "graceful" way to recant.

I don’t think they will recant on the policy objective of somehow limiting tax concessions for large balances. Arriving at a workable solution will be the challenge. Most people won’t give two hoots about an additional tax on large balances, or the method for taxing them. And if the Government caves in and indexed the threshold, I expect even a smaller proportion of the population will be offended.

The reason it is incorrectly called a 30% tax is not because the new tax itself is 30%, but it is on top of the 15% tax paid on accumulation funds. In fact, if a member held $3 million in a pension account, then it would be a 15% tax in total with 0% on the first $3 million. The above is taken from the article. It is incorrect. If the member held $3m in a pension account, the earnings on the first $1.7m is tax free, the earnings on the remaining $1.3m is taxed at 15%.

Sorry Mic, the article is correct, your understanding is wrong.

The above comments in the article refer exclusively to an attempt to describe this new tax.

So it is accurate. But could have been better explained.

Mic's comments seem to relate to the "income tax" paid by super funds.

As the article highlights, these are 2 separate taxes people. Stop trying to describe them in any other way.

Hi Mic, you are confusing the purpose of the Transfer Balance Cap (currently $1.7 million). It is the amount that can be initially transferred into a pension account, not a limit on the subsequent balance. Any amount over the TBC can be left in the account if investment earnings grow.

Re Mic and Graham's discussion: If my Pension account balance happens to be $4m (is not, but say) and earnings are $200k (5%), then leaving aside any withdrawals, my fund would pay no tax on the earnings due to the $3m but 15% (being 0 + 15)% increase what would otherwise be levied on pension account) on the earnings due to the $1m or 1/4 * $200k = $50k (making up the excess balance over the $3m) - is this correct? If so, then the extra tax would be $7.5k. And of course this would be 0.2% on the whole balance in the Pension account. Please correct me if I have misunderstood.

JohnT

"Nobody would argue that a 45% personal tax rate and a 10% on GST gives a total tax rate of 55%": I am Nobody. I argue that total tax rate where income tax is 45% and GST is 10% of net income: = 45% + 10% * (1 - 45%) = 50.5% But being Nobody, I pay close to $0 & 0% income tax and as close to $0 GST as is practicable.

The need for a maximum member balance amount of super is clear. No argument, on an equity basis. Also, in the future, the existing constraints on contributions already in place will mean that today's high balances will not occur as time passes. To avoid all of the pot holes that have emerged regarding the route laid out by Chalmers, why not leave the assets in each super fund unaffected, but devise a means to fairly and reasonably tax the pro rata amount of income attributed to a member by adding that pro rata amount to the member's personal taxable income. Firstly, this means unrealised capital gains within the fund are no longer included. The pro rata income amount for the individual is the member's cash income received in the year, minus the income that the member would have received if the member's total balance at the start of the year was A$3M, with this $3M being indexed. The benefit is that the member's extra tax payable is available as it part of the cash received by the fund for the year.

"Also, in the future, the existing constraints on contributions already in place will mean that today's high balances will not occur as time passes.":

They could and could still. Just need 'Fabulous Investments'. $1 that through astonishing capital gains and / or dividends multiplies magically.

The calculations presented here must have very low return assumptions. Anyone entering the workforce today and earning average wages whilst being forced to pay 12% in super will pay this tax by the time they retire if the $3 million is not indexed. Therefore, it is not a modest amount of people it is at least half the population.

Try stepping out of your Mercedes and selling that story to the majority of low to middle-income Australians...

Simple if you have more than $3 million then you are required to remove the excess over $3 million. Anything over $3 million is not super but money parked in a tax effective investment vehicle.

Except the very people who are outraged by this proposal are the same people who would have been arguing against this!

The tax-effective investment vehicle needs to be tax effective otherwise no one would tie their money up for 40 odd years.

If you have a 'good year' and earn 20% you will need to remove $600k For most people that would require selling assets, assuming sufficient dividable assets are held. This would also trigger CGT on at least a portion of the $600k.

Now you have $600k and experience a 'bad year' and you lose 20% -- can you recontribute?

Have you considered the impact of a GFC or Covid impact on the Balance of the Super Fund. Tax has been paid on increases in fund value over a no. of years and a GFC or Covid type event happens Balance reduces and member dies and fund is liquidated. The tax paid on unrealised gains is not refundable and has been paid on gains that never came to fruition.

Much like income tax paid on income in years before a pay cut. Or Division 293 tax paid in years where items one-off items of income are received (e.g. redundancy). And, let's not forget that unrealised losses are to be carried forward - so all should sort itself out in the long run it would seem.

Once again the "pure' economists in Treasury have done a job on Diamond Jim. They have had their "hit list " for 50 + years and super is high on it. In their "economist" minds there is no difference between a $100k salary and a $100k uplift in asset value at the end of the year. So, they "redefined" earnings for these purposes and Diamond Jim, Albo and all the other "hangers on" in their offices totally glossed over this reality. Marles made an absolute mess of it as well. Your article points out some very valid points - especially the fact that the capital gains are going to be taxed twice under the current proposal. If you accept that the "evil" of having high super balances should be penalised - then all they had to do (in the fund) was tax the first $1.7m at nil ( provided a complying pension was paid), the next tier up to $3m gets taxed at 15% and any excess over $3m is taxed at 30%. Simples!

"then all they had to do (in the fund) was tax the first $1.7m at nil ( provided a complying pension was paid), the next tier up to $3m gets taxed at 15% and any excess over $3m is taxed at 30%. Simples!" Except that would lead to a higher tax liability...

Not at all. I don't think that Greg includes unrealused gains as taxable income. The tiers give the thresholds for ncome tax rates on taxable income only.

The formula creates a new form of taxpayer on top of individuals and their super funds. By providing the tax can be paid by the fund and / or the member, the regime shifts to fuzzy terrain. This breaches the existing rule that super-related tax can only be paid from super (to avoid circumventing contribution caps). Is this dilution intended? Given the hurry with which Treasury announced its formula, there is understandable confusion about capital gains not being discounted and franking credits not being set off. This may be an unfounded scare, as the existing tax regime will allow for both already in the fund's taxation, and allowing them in the new tax might be double counting. Seems Treasury did not get this one wrong, solely due to its oversight! When the pension TBC moves beyond its expected $1.9 million limit in time, pension asset earnings may not be tax exempt. Compounding has its seemy side, and pensioners are not off the hook. There is a simple alternative without the tortured mess of the formula. Currently, funds work out exempt current pension income when they have accumulation and pension liabilities taxed at 15% and 0% (excluding NALI). All that we need is a new 30% bucket for balances above $3m (to be advised by ATO as only it has access to TSB data). Get the actuary to certify the weighted average accumulation / pension / special tax balances and the current regime will take care of the laudable objective demonised by devious execution. The angst on taxing unrealised gains and the absence of relief when values tank subsequently will be gone. Too simple perhaps, like Einstein who required an extra exit for the kitten when the existing hole for their parent would have sufficed? Civil service DNA cannot get past dig and refill job creation, never mind productivity.

So much misinformation and scaremongering... "Their formula creates a new form of taxpayer on top of individuals and their super funds. By providing the tax can be paid by the fund and / or the member, the regime shifts to fuzzy terrain. This breaches the existing rule that super-related tax can only be paid from super (to avoid circumventing contribution caps). Is this dilution intended?" Division 293 tax already does this... It's not "income" that is being taxed. So forget about income tax concepts e.g. franking credits or CGT discounts. Sure (or maybe) if this was an SMSF only tax. But an actuary to perform calculations on multiple individual accounts within APRA funds? Really? Nothing is set to change on tax exemption to pension earnings up to TBC. Please leave Einstein out of this...

Super tax can only be paid from super? Dilution? Nope. We already have Div 293 tax. There is no suggestion that earnings in pension phase will be taxable (within an individual's TBC). This tax will not change the way fund income tax is charged. This is a new and separate tax as explained by the article. Do you really expect an actuary to review multiple member balances across multiple APRA funds? This might have been a solution if it was an SMSF only measure, but it isn't, so it's not. 

In an ideal world the tax would be calculated on actual earnings using an actuary each year to work out what is 0% (Pension) 15% or 30%. However, many people have more than one super account. They might have a defined benefit fund and an industry fund. Or an industry fund plus an SMSF. The reasons for this are varied but valid. While it would be the preferred method and more equitable, an actuarial calculation would only work if you had one super account.

Some of us just continued with the official figure for sake of simplicity when responding or commenting. Going by comments on articles about the new changes there are still many that don't understand this yet. It would be easier just to index the $3M figure than leave it for future governments to amend whenever. The figure is a line in the sand saying it is sufficient to fund retirement, in fact JC even said that it was sufficient, so it is a no brainer that one should be able to take out any amount over, regardless of age. Most early release options are taxed though so I'd expect that to be a requirement of any early release that came about. Condition of release: A fund member who's TSB exceeds the Cap in any financial year can apply to withdraw those amounts over the TSB.

So, it is a "tax", but not a "tax" as we know it. It seems even Dictionarys might need updating:
Tax [taks] NOUN

a compulsory contribution to state revenue, levied by the government on workers' income and business profits, or added to the cost of some goods, services, and transactions:

"higher taxes will dampen consumer spending" · "a tax on fuel" · "they will have to pay tax on interest earned by savings" · "a tax bill" · "tax cuts"

Just let people take out the excess over $3m at the end of each year. If they don’t, the excess income is added to the personal income.

That doesn't work when you have large indivisible assets in your SMSF, like property for instance, and potentially has high transaction costs such as stamp duty.

Maybe some investment strategies will require a re-think? After all, they should already be considering liquidity and ability to meet expenses etc.

Taxy I agree entirely, there are many SMSF investors who haven't considered any of those issues, in particular those in pension phase who are about to go back to the regular minimum distributions. Taxing unrealised gains is going to make that even more of an issue.

So what’s a workable solution then?

Doesn't need to be compulsory but should be optional.

Those of preservation or Retirement age have options. Those under preservation age are caught in a trap, they should have the option.

As for illiquidity in funds, some have it for no other reason than it is for wealth fund purposes to be left for the kids so they are happy to have had minimal liquidity.

Taxy, good point. Maybe it doesn’t have to be a cash withdrawal but a nominal interest based on the excess amount can be added to the personal income.

Graham - great pick ups and for my money (taxed at 15%!) your article demonstrates the law of unintended consequences. I doubt Chalmers and co even begin to understand the overall impact on the superannuation system view that this 'modest' change drives (as your conclusion notes) ... "first this, what next?" as Dutton and some media outlets have already noted. Just to add to your noted work arounds - a couple of folk in my orbit with younger aged spouses are already looking forward to putting 3 years undeducted amounts ($330k) into the younger spouse super fund once they (the older partner) reach a condition of release (given they have large balances and the younger spouse much more modest - that word again - balances). I truly can't see this change is going to bring Labor anywhere near the revenue they are anticipating. Oh well, the dogs bark and the caravans move on ......