What are the proposed super tax changes and how will they affect you?

At this point, you’ve probably heard about the government’s proposed super tax changes. Announced on 28 February, these changes could have significant effects for anyone with a superannuation balance over $3 million.

While it hasn’t yet been signed into law, it’s important to understand how these changes would work and how they could affect your retirement. Here’s a summary of what you need to know about the new proposal.

Who would the changes affect?

If implemented, these changes would have the biggest impact on people with higher super balances—specifically, balances greater than $3 million—affecting their taxes and estate and retirement planning. The government estimates that these changes will affect 10% of people retiring in 30 years.

What are the changes?

The new policy seeks to put a cap on tax concessions for super accounts that exceed $3 million. Currently, super accounts are taxed at 15%. If the changes are implemented, any funds over $3 million will be taxed at 30% (an additional 15% on top of the original 15%). You’ll be subject to this higher tax rate if your total super balance exceeds $3 million at the end of a financial year.

It’s important to realize that if your account exceeds $3 million, you won’t be taxed at 30% on everything in your account—only on the amount above the $3 million threshold. And you won’t be taxed on actual fund earnings, but on your total super balance (TSB) at the start and end of each year, after adjustments for any contributions or withdrawals made that year.

Here are a few more details about how the proposed changes will work if implemented:

• If you have negative earnings one year, you can carry that forward to offset additional taxes you may become liable for in the future.
• The changes won’t affect any existing capital gains tax concessions that are available to your super fund.
• The 30% rate will only apply to earnings from the start date onward, and won’t be applied retroactively.
• You can pay the tax or release it from your superannuation.
• These changes will also apply to defined benefit funds.

When would these changes go into effect?

These changes would go into effect starting 1 July 2025. As mentioned above, under the new proposal, you’ll be subject to the 30% tax rate if your TSB exceeds $3 million at the end of the year, which means your TSB will first be tested for this on 30 June 2026. If the changes affect you, you’ll receive a notice of tax liability from the ATO in the 2026/27 financial year.

What should I do if my TSB is over $3 million?

If the proposed changes affect you, you may want to meet with your financial advisor to go over your superannuation, investment and estate planning strategies and ensure your plans for retirement are still optimal. A super account may still be a worthwhile option for you, especially if you have a high income and are currently paying taxes at the top marginal rate (47%), but there’s no harm in taking stock of your situation and reconsidering.

A financial advisor can help you consider strategies like:

• Alternative investment options
• Timing your withdrawals in line with how earnings are calculated
• Splitting contributions with your spouse to maximize total super tax concessions

How do I calculate my TSB and tax liability?

You can use the following formulas to calculate your earnings and taxes payable.

1. Earnings = TSB at end of current financial year – TSB at end of previous financial years + withdrawals – net contributions

To calculate earnings, take your TSB from the end of the current financial year and subtract your TSB from the end of the previous financial year. Then add the amount of withdrawals minus any net contributions.

2. Proportion of earnings that are taxable = (TSB at the end of the current financial year – $3 million) / TSB at the end of the current financial year

To calculate your taxable earnings, take your TSB from the end of the current financial year and subtract $3 million. Then divide that number by your TSB from the end of the current financial year.

3. Tax liability = 15% x Earnings x Proportion of earnings that are taxable

To calculate your tax liability, multiply your earnings (1) by 15%, then multiply that by the proportion of your earnings that are taxable (2).

If you need help understanding the proposed changes or rethinking your retirement strategy, remember we’re always here for you.