The Government’s draft legislation imposes an additional 15% tax on certain earnings for individuals whose total superannuation balance is in excess of $3 Million.

We finally have a name and further details of the exposure draft Treasury Laws Amendment (Better Targeted Superannuation Concessions) Bill 2023. together with accompanying explanatory materials, which was released on  3 October 2023.

If legislated, it will be effective from 1 July 2025, and applicable to members with a total super balance (TSB) in excess of $3M, who also have superannuation earnings greater than nil.

How the calculation works.

This is a rather complicated calculation, determined by a four-step process:

Step 1. Calculate the proportionate percentage above $3M which is applied to the adjusted superannuation earnings.

Step 2.  Basic superannuation earnings are calculated as the difference between the adjusted total super balance at the end of the year less the opening total super balance. The adjusted closing balances adds back certain withdrawals and deducts certain contributions.

Step 3. Calculate taxable superannuation earnings (TSE).

• Step 1 x Step 2

Step 4. Apply 15% tax to Taxable super earnings.

This can be best shown by way of an example:

Jess has a TSB of $4 million on 30 June 2025, and $4.5 million at 30 June 2026. Jess receives concessional contributions to superannuation of $27,500 in the 2025-26 income year, including $12,500 in salary sacrifice contributions.

Additionally, as she had met a condition of release, she has withdrawn $10,000 as a lump sum payment.

Step1. Proportion above $3M as a %

$4.5M -$3M   x 100= 33.33%

$4.5M

Step 2. Basic superannuation earnings.

Adjusted closing super balance =

$4.5M + $10K – (85% x $27,500) = $4,486,625

Adjusted closing super balance less opening super balance

$4,486,625- $4,000,000= $486,625.

Step 3.  Apply Step 1. x Step 2.

$486,625 x 33.33%=$162,190

Step 4.  Division 296 Tax liability

$162,190 x 15%= $24,328.50

For Division 296 tax purposes, her withdrawal for the year is the $10,000 lump sum payment. Her contributions for the year are $23,375 after correcting for the 15% tax paid by her superannuation fund on these concessional contributions (85% x $27,500).

Some key points:

• TSB includes unrealised capital gains.
• The $3M will not be indexed.
• The draft legislation doesn’t refer to $3Million dollars but refers to “large superannuation balance threshold” being $3M; it is hoped that down the track this will allow for ease of changing the $3M threshold.
• Negative losses are quarantined and carried forward to be offset against any future gains but are lost at the time of your death. The negative losses are not refunded at any point.
• The ATO will calculate the tax and send the assessment.
• The tax is levied on the individual not the superfund. You can however, request to have it released form super under a valid release authority. Bear in mind that the superfund will thus need to have sufficient liquidity in the fund to be able to pay the tax – farms, unlisted investments, and property may be problematic.
• Excludes foreign superfunds from your TSB calculation.
• You are exempt from Div 296 if you have previously received or do receive a structured settlement such as a personal injury in your fund.
• LRBA entered into after 1 July 2018 that are either from a related party lender, and/or the members has met a condition of release are excluded from the TSB calculation.

The draft legislation does provide details of what makes up the taxable superannuation earnings.

Withdrawal definition results in the following being added:

• Superannuation benefits paid from your super interests (income stream and/or lump sums).
• Any valid release authorities, Div 293 tax, excess concessional and excess non-concessional as well as the new Div 296 tax, in effect this will be double counted.
• Any super contribution split rolled over during the year.
• Any super benefits transferred as a result of a family payment split.

Contributions definition results in the below being deducted:

• All contributions – down sizer, non-concessional, and 85% of concessional contributions.
• Contributions-splitting superannuation benefits payments.
• Family law superannuation payments made due to a payment split.
• The TSB value of a superannuation death benefit interest when the individual becomes a retirement phase recipient (reversionary pension in the first year it reverts).
• A death or total and permanent disability insurance payment (TPD) or contingent beneficiary payment (with the exception of a continuous disability payments).

It is worth noting that while some items are deducted, this is only applicable for the first year it applies, however, these amounts will form part of a members TSB in the following year, such as TPD insurance payouts and death benefit pensions/reversionary pensions.

Conclusions

While the ATO will perform the calculation and issue an assessment, it is anticipated that there will be onerous obligations by the auditor to determine market valuation of unlisted investments as this will impact a member’s TSB. This is being proposed as a fair and equitable tax, which begs the question as to what is equitable about taxing unrealised capital gains, not refunding negative losses and double taxing valid release authorities amounts.

Whilst this draft legislation is complex, careful planning and calculating the difference in tax inside or outside of the superannuation environment will still allow for many advantages in maintaining one’s superannuation, including the impact of franking credits, combined with the tax exemption for income streams which lowers a member’s overall tax rate inside the superannuation environment.

Talk to one of your SIP directors or contact Sharon Gdanski for strategies to assist you.

*Remember this legislation has not yet passed, so be mindful not to act in haste.