The Federal Government has introduced a proposal to impose a limit on tax concessions for superannuation, which may result in individuals with substantial superannuation balances paying more tax.

The announcement links the changes to less than 0.5% of all Australians – around 80,000 people – arguably most in SMSFs. Interestingly, the amount does not intend to be indexed. So in reality, this will capture more and more individuals as the value of money rises over time.

The result of this change, should it pass, will mean that we further expand our already tiered superannuation system:

Dealing with “mega-balances”

It is important to remember that this process actually started back in 2017 with the introduction of the transfer balance cap measures. These super reforms ultimately created an end date for large balances to remain in super– the baby boomers, under the current laws are, in reality, the last superannuants that will have such significant balances.

There might be a few outliers with amazing investment performance (think successful start-ups), but the super laws now require benefits to leave the super system generally on death and paid to the beneficiaries.

How the proposal intends to work

It hasn’t taken too long for Treasury to provide guidance on how these rules intend to work. As part of the Treasurer’s announcement, a fact sheet was released that provided workings on how these measures intend to operate.

Individuals at the end of the financial year with a total superannuation balance (TSB) > $3.0m and in pension phase will be subject to tax of 15% on earnings. The tax is in addition to any tax the SMSF pays on earnings in accumulation (ie. 30% tax rate applies).

The tax only applies to the proportion of earnings corresponding to balances > $3.0m. The calculation works with reference to the difference in the TSB at the start and end of the financial year, adjusted for withdrawals and contributions (note: this will include unrealised changes in asset values). For more personalised advice, please don’t hesitate to contact your advisor.