How The Proposed Superannuation Tax Changes Will Affect You

The Australian government has announced a plan to reduce the tax concessions for superannuation accounts with balances over $3 million, starting from 1st July, 2025.

This is part of its agenda to make the super system fairer and more sustainable, as well as to raise tax revenues. But how will this change affect you and your retirement savings? In this article, we’ll explore the details of the proposed superannuation tax changes, the impact on different types of super funds and individuals, and the steps you can take to prepare for the change.

Proposed Superannuation Tax Changes in Detail

The Labor government wants to increase the tax rate on superannuation earnings above $3 million from 15% to 30% starting July 1, 2025.

This will apply to all accumulation and pension accounts, including self-managed and industry super funds. However, it won’t affect tax-free status for pension income, tax offsets, or exemptions for those aged 60 or older.

The $3 million threshold will not be adjusted for inflation and will apply per person, making more people subject to the tax over time as their super balances grow.

You would not be able to avoid this tax change by dividing your super balance among multiple accounts or funds. The change allows for a $3 million threshold per person.

The tax change is expected to affect 0.5% of super account holders, or around 80,000 people. The government has framed this as a fair and progressive measure that targets the wealthiest and most privileged superannuants, raising an estimated $9 billion over four years.

How Will the Superannuation Tax Changes Affect You?

Depending on your circumstances like super balance, income, age, and fund type, the proposed superannuation tax changes will impact you differently. In general, expect a reduction in after-tax super earnings and retirement income, particularly if you have a large super balance or a long investment horizon.

For example, a $4 million super balance with a 5% annual return would cost an extra $7,500 in tax each year under the proposed change. Over ten years, this could reduce your super balance by $100,000, without considering other adjustments.

The tax change would discourage investing in high-growth assets that generate capital gains. Capital gains will be taxed at the higher rate of 30% when realized, missing out on the capital gains tax discount that lowers the tax rate by 50% for assets held more than 12 months.

Self-managed superannuation funds (SMSFs) will face increased complexity and compliance costs, while industry super funds will need to balance the interests and preferences of members with different super balances and tax rates, affecting their investment strategies and performance.

Note that these changes have not become law yet and will not be implemented until after the next Federal Election.

Preparing for the Superannuation Tax Changes

Note that the proposal has not been finalised yet and it may face challenges from the crossbench and industry. That said, it’s wise to be proactive and stay informed about the potential impact on your retirement savings.

If you have a super balance over $3 million, or you expect one in the future, you may want to start planning ahead.

Here are some of the things you can do to prepare for the tax change:

Review your pension drawdown strategy and eligibility for tax offsets. You may still be eligible for tax-free income, or reduce tax liability with low and middle-income tax offset, seniors and pensioners tax offset, or franking credits refund. Timing and amount of pension payments will affect super balance and tax rate.

If you have an SMSF, consider how you might need to update your SMSF trust deed, investment strategy, and reporting obligations. In particular , ensure your trust deed allows for different tax rates and investment strategy reflects your risk appetite and return objectives under the new tax regime. You’ll also need to make sure you comply with new reporting requirements for the ATO, providing member account balances and tax rates quarterly.

Review your asset allocation and diversification to optimise returns and minimise tax liability. Review your exposure to high-growth assets that generate capital gains as they will be taxed at the higher rate of 30%. Shift some assets to low-tax or tax-free investments, such as bonds, cash, or international shares, or defer capital gains until retirement or withdrawal. Diversify portfolio across different asset classes and sectors to reduce risk and volatility .

Consult an accountant or administrator for professional advice. Seek guidance on the impact of the tax change on your specific situation, and advice on the best strategies and options for your super fund.

Monitor your super balance and stay informed of any updates or changes to legislation. The proposed tax change may face challenges from the crossbench and the industry. Keep track of your super balance and the progress of the legislation, and adjust plans accordingly.

If your super balance exceeds $3m or you think there is a chance that it will do, we’re here to help. House of Wealth specialises in helping property investors minimise tax on retirement income. Click here to book a consultation.

This article is intended as an information source only and to provide general information only. The comments, examples, words and extracts from legislation and other sources in this publication do not constitute legal advice, financial or tax advice and should not be relied upon as such. All readers should seek advice from a professional adviser regarding the application of any of the comments in this article to their particular situation.