Understanding the new $3 million super tax

With significant changes to superannuation tax laws on the horizon, it is essential for high-net-worth individuals to understand the potential impact on their wealth. The looming increase in tax rates on superannuation balances exceeding $3 million has generated substantial debate. As the implementation date draws near, taking a thoughtful and informed approach is vital. However, note that this measure is not yet law.

What’s Changing?

The Australian Government has proposed to increase the tax rate on earnings of superannuation balances above $3 million from 15% to 30%. Scheduled to commence on 1 July next year (2025), this change is expected to generate $2.3 billion in its first year. The bill, formally known as the Treasury Laws Amendment (Better Targeted Superannuation Concessions and Other Measures) Bill 2023, aims to create a more equitable taxation system by targeting larger superannuation balances.

Why the Urgency?

We are stressing the importance of a timely resolution to avoid rushed financial decisions. The current uncertainty over whether the bill will pass, and in what form, poses significant challenges. For those with substantial superannuation balances, particularly in less liquid assets like property, private equity, and art, careful planning is essential.

The Issue of Unrealised Gains

A major point of contention in the proposed legislation is the taxing of unrealised gains. Unrealised gains refer to the increase in value of assets, such as shares and property, before they are sold. Many argue that this approach disproportionately affects self-managed super funds (SMSFs), which often hold less liquid assets. Meeting tax obligations without the ability to sell these investments can be challenging and disruptive.

In response to these concerns, a coalition of financial advice and accounting groups is lobbying for adjustments to the bill. They propose indexing the $3 million cap to prevent bracket creep and taxing realised gains instead of unrealised gains. This alternative would provide a more consistent and manageable tax framework, thereby avoiding the need for premature asset sales.

Strategic Withdrawals and Timing

Given the proposed tax changes, one effective strategy to manage your super balance is to consider making strategic withdrawals. Naturally, withdrawal rules apply. Access to super is generally restricted until you reach your preservation age and meet a condition of release, such as retirement.

• Reduce Super Balance: Withdraw funds in the year before the tax takes effect to bring the closing balance below $3 million.
• Target Balance: Aim for a closing total super balance of around $2.9 million each year to avoid triggering the tax.
• Additional Withdrawals: Withdraw additional amounts on top of minimum pension payments to maintain the balance below $3 million.

Timing your financial moves is also very important here. The $3 million threshold is assessed at the end of each financial year (June 30), not the beginning. Make sure you speak with us before deciding on a strategy.

Investment Strategies

Once funds are withdrawn from super, reinvesting them outside the superannuation system can be beneficial:

• Invest Outside Super: Withdrawn amounts can be invested outside of super to potentially save on overall taxes, especially for couples who can split investments.
• Tax Implications: Be mindful of the tax implications of investing withdrawn amounts, as personal tax rates may be higher than super tax rates in some cases.

Other Considerations

There are several additional factors to keep in mind:

• Non-Indexed Threshold: The $3 million threshold is not indexed, so its real value will decrease over time.
• Couples Strategies: For couples, consider balancing super accounts between partners to maximise the combined $6 million threshold before the tax applies.
• Evaluate Trade-offs: Evaluate the trade-offs between paying the additional tax versus withdrawing and investing outside super based on personal circumstances and tax rates.

These strategies should be carefully considered with professional advice, as individual circumstances can greatly affect the optimal approach. It’s important to note that the legislation is not yet finalised, so some details may change before implementation in 2025.

What Steps Should You Take?

Here are some steps to consider while we wait for more clarity:

1. Stay Informed: Keep up with the latest news and legislative updates. Our team will provide further information as they become available. So make sure you subscribe to our newsletter.
2. Evaluate Your Portfolio: We can assist in analysing your superannuation balance and projected earnings under different scenarios to help you understand potential tax implications.
3. Plan for Liquidity: If your superannuation includes illiquid assets, it is vital to consider how you might manage these holdings if the tax changes take effect. We can help create strategies to maintain liquidity without sacrificing long-term growth.
4. Seek Professional Advice: Our advisers are here to help you navigate these complex issues. Whether it is understanding the potential impact or planning for various outcomes, professional guidance is invaluable.

Final Thoughts

The proposed superannuation tax changes highlight the importance of proactive and informed financial planning. By staying ahead of legislative developments and seeking expert advice, you can ensure that your financial strategies remain robust and effective, regardless of the changes ahead.

For personalised advice and comprehensive planning, please contact our team. We are committed to helping you achieve financial security and peace of mind.