A new super earnings tax on high balances

The change was announced in the context of an open consultation on legislating the policy objective of superannuation, which (as proposed) is “to preserve savings to deliver income for a dignified retirement, alongside government support, in an equitable and sustainable way”. The Government has since released an exposure draft of legislation to give effect to this change.

It also came the same day Treasury released its annual 2022-23 Tax Expenditures Statement, which shows superannuation tax breaks are worth about $50 billion per year, the majority of which flow to high income earners. Treasury projects that the cost of the super tax concessions will exceed that of the age pension by 2050.

More broadly, the announcement has come as the Government has been working to improve the federal budget position.

Against this backdrop, the change is intended to better target the superannuation concessions, improve equity and make the superannuation system more sustainable.

The new tax is intended to be effective from 1 July 2025, with the first assessments being issued in 2026-27 or later.

The change is not yet law. Following public consultation, the Government aims to introduce legislation as soon as practicable.

Individuals with a Total Superannuation Balance (TSB) over $3 million will be subject to an additional tax of 15 per cent on earnings corresponding to the amount above the $3 million threshold.

According to the Government, the new tax will apply to around 80,000 people.

Individuals with balances below the $3 million threshold will not be impacted by the change.

The Government has affirmed its intention not to automatically index the threshold, so the number of people subject to the tax may increase over time as super balances grow.

Exceptions

An individual who meets any of the following three exceptions in an income year will not be liable for Division 296 tax:

• an individual who is a child recipient of a superannuation income stream (because of the death of their parent) at the end of the income year
• an individual who has made a structured settlement contribution during the income year or in any earlier income year
• an individual who dies before the last day of the income year.

The approach to implementation is intended to minimise compliance costs and complexity, particularly given it will initially impact just 0.5 per cent of superannuation fund members. In the Government’s own words:

As the overwhelming majority of superannuation members are unaffected by this measure, the Government’s implementation approach seeks to avoid imposing significant (and potentially costly) systems and reporting changes that could indirectly affect other members. The proposed approach is based on existing fund reporting requirements. Noting that funds do not currently report (or generally calculate) taxable earnings at an individual member level, the calculation uses an alternative method for identifying taxable earnings for members with balances over $3 million.¹

Rather than the new tax being applied at the super fund level as with existing earnings tax arrangements, it will be levied on impacted super fund members directly, in a similar way to Division 293 tax (the existing additional 15% tax that applies to the concessional contributions of higher income earners). The member will have the choice to pay the tax out-of-pocket or from their superannuation balances.

Only the proportion of earnings corresponding to balances above $3 million will attract the additional 15 per cent tax.

Earnings will be calculated with reference to the differences in TSB at the start and end of the financial year, with adjustments made for contributions and withdrawals made during the year.

According to Treasury, accounting for withdrawals and contributions is not intended to represent a comprehensive adjustment for all cash flows throughout the year. Rather, these adjustments make provision for events that would otherwise skew the estimated earnings calculation due to their direct impact on an individual’s TSB at the end of the financial year.²

The exposure draft released in October 2023 provides additional details on the contributions and withdrawals which will be factored into the calculations.

If an individual experiences an earnings loss in a financial year, the loss can be carried forward to reduce earnings in future years.
 

• Calculation process
• Components of the calculations
• Examples

The ATO will rely largely on existing reporting mechanisms to determine who is subject to the new tax and to calculate the tax liability. However, some of the information the ATO will require to calculate the tax liability is not currently reported by super funds to the ATO. For example, APRA-regulated super funds do not currently report benefit payments, including pension payments. The Government has noted a preference to deal with any missing data through targeted reporting obligations and sought views on the method as part of the consultation process. The exposure draft legislation released in October 2023 does not provide any further detail on additional reporting requirements.

Once the tax liability has been calculated (by the ATO), a notice of assessment for the tax will be sent to individual, who will have the choice of paying the amount out-of-pocket or electing to release an amount from one or more of their super funds.

Similar to Division 293 tax, the new earnings tax will be separate from regular income tax arrangements. It will not be possible to reduce the tax liability through deductions, tax offsets and losses available via the personal income tax system.

The exposure draft proposes administrative arrangements that largely mirror those applying to Division 293 tax. However, a longer period of time will be provided for payment of Division 296 tax following the notice of assessment compared to Division 293 tax (84 days compared to 21 days). In addition, where a Division 296 tax liability remains unpaid after the due date, the debt will attract a specific general interest charge rate that is lower than the standard rate, calculated under the same method as the shortfall interest charge. The draft explanatory memorandum states that this allows taxpayers to be charged a rate of interest that is broadly similar to market rates and means that the rate of interest does not penalise taxpayers if they do not have liquidity within or outside of superannuation to meet the tax liability.

Through the initial consultation process, the Government sought views on how it can apply a broadly commensurate treatment to defined benefit superannuation accounts. Aside from removing the link between TSB and Transfer Balance Account to ensure income streams are valued on an annual basis, the exposure draft leaves much of the detail around how these interests will be valued to the regulations, which are yet to be released.

In recognition that a defined benefit interest in the accumulation phase typically cannot be accessed to pay tax debts, Division 296 tax will be deferred to a debt account specific to the particular superannuation interest. The debt account arrangements largely mirror those applying to Division 293 tax, with interest calculated at the long-term bond rate at the end of the year. The exposure draft provides for deferral until 21 days after the first superannuation benefit is paid. Exceptions are proposed for certain kinds of superannuation benefits, for example a rollover or a benefit paid under severe financial hardship or on compassionate grounds. A member will be able to make a voluntary payment prior to this time (either from money outside superannuation or with money released from other funds under a release authority).

Constitutionally protected funds (CPFs) are prevented from being taxed directly due to constitutional limitations. Certain individual members of CPFs may also have certain tax protections. Amendments are proposed that exclude earnings on interests in CPFs from Division 296 tax. However, these interests will be counted for the purposes of determining if TSB exceeds the $3 million threshold.

In addition, no Division 296 tax will be imposed on earnings in respect of a defined benefit interest in a superannuation fund established under the Judges’ Pension Act 1968 of a sitting Commonwealth justice, where that person was appointed prior to 1 July 2025 and whilst they remain employed. Once again, the interests will be counted in the $3 million threshold but the excluded interests will not be counted when calculating the taxable superannuation earnings.

Once the Government has considered feedback on the exposure draft, a bill containing the changes will be introduced in Parliament.

Further details, including on the treatment of defined benefit interests, will be contained in regulations, yet to be released.