Starting 1 July 2025, the Australian government will impose an additional 15% tax on superannuation balances exceeding $3 million. This change aims to reduce tax concessions for high-balance super fund members. If your total superannuation balance exceeds this threshold or you think it will exceed this threshold in the future, it's important to understand how this change may impact you.

Tax for higher super account balances over $3 million

The government intends to reduce tax concessions for super fund members with balances over $3 million. Division 296 introduces an additional 15% tax on investment earnings for these balances, affecting concessional contributions and non-concessional contributions.

The Adjusted Total Super Balance (ATSB) determines the $3 million threshold, considering the market value of assets. The ATSB calculation includes earnings apportionment and allows for the carry forward of negative earnings to future financial years. This tax liability can be paid personally or from the super fund.

How the new rules work for balances exceeding $3 million

The Adjusted Total Super Balance (ATSB) plays a crucial role in determining if your super balance exceeds the $3 million threshold. The ATSB encompasses all your superannuation interests, factoring in contributions, withdrawals, and specific exclusions during the financial year. The Australian Taxation Office (ATO) assesses the market value of assets when evaluating super balances, impacting super funds holding property or speculative assets due to market fluctuations.

For Division 296 purposes, the ATSB calculation includes the movement between opening and closing balances, contributions, withdrawals, and unrealised gains or losses. Deemed earnings are apportioned based on the account balance over the $3 million threshold. An extra 15% tax applies to these earnings in addition to the standard 15% tax on super fund earnings, resulting in an effective tax rate of 30%. Negative earnings can be carried forward to future financial years, reducing future Division 296 tax liabilities and providing some relief from the additional tax burden.

When it comes to paying the Division 296 tax liability, individuals have flexible options. You can choose to pay the tax personally or have it deducted from your super fund. If you have multiple super funds, you can select which fund will cover the tax. Understanding these new rules and terms like 'concessional contributions cap', 'excess contributions', and 'the carry forward rule' will help you better manage your super balance and tax obligations.

Key elements of the proposed new tax framework for super balances

Tax rate

A 30% concessional tax rate applies to future earnings for super balances above $3 million. Division 296 tax adds an extra 15%, making the effective tax rate 30%.

Tax liability

Superannuation funds will continue to pay a 15% tax on earnings. Individual members, however, will be liable for an additional 15% tax on their super accounts' earnings, which is separate from their regular income tax liabilities. This additional tax, imposed by the Australian Taxation Office (ATO), will be levied directly on individual members rather than the superannuation fund itself.

Earnings calculation

Earnings will be calculated based on the movement between a member’s opening and closing total superannuation balances for the financial year, adjusted for withdrawals, contributions, and specific exclusions. This calculation will capture unrealised capital gains, as the total super balance includes both unrealised gains and losses.

Tax payment

Individuals can choose to pay the tax themselves or have it deducted from their superannuation funds. Those with multiple superannuation funds have the flexibility to select which fund will cover the tax liability.

Impact on individuals and revenue generation

Less than 0.5% of superannuation account holders are projected to be impacted, with an estimated $2 billion in revenue generated during the initial full financial year. Because the $3 million threshold remains unindexed, a growing number of individuals will likely surpass this limit as time progresses

No limit on super balances

There is no proposed limit on superannuation balances; however, the additional tax applies only to earnings from the portion of an individual's account balance that exceeds $3 million. As this threshold is not indexed, an increasing number of individuals are expected to surpass this limit over time.

Revising your superannuation strategy under the new tax rules

Superannuation remains an attractive investment strategy for many Australians due to its favourable tax treatment. However, if you have higher account balances, it's important to understand the potential impact of the Division 296 tax. The potential taxation on unrealised gains could make long-term investments, such as property, less appealing from a tax perspective, as you might end up being taxed on a value increase that never materialises upon sale.

The Division 296 tax will necessitate more frequent and detailed asset valuations, adding an administrative burden to the management of your super fund. You'll need to weigh this burden against the tax benefits provided by superannuation.

Additional information on concessional and non-concessional contribution caps

What is the concessional contribution cap?

For the 2024/25 financial year, the concessional contribution cap is set at $30,000 annually. This cap includes all before-tax contributions such as employer contributions, salary sacrifice arrangements, and personal contributions that you claim as a tax deduction. Contributions are taxed at a concessional rate of 15% if your taxable income is less than $250,000 per year. If your income exceeds $250,000, the contributions are taxed at 30%. If you exceed the concessional contribution cap, the excess concessional contributions will be included in your assessable income and taxed at your marginal tax rate, with a 15% tax offset to account for the tax already paid by the super fund.

How to carry forward unused concessional contributions

If you do not reach the before-tax contribution cap within a given year, the carry forward rule allows you to carry over the unused portion to future financial years. This rule applies to concessional contributions, permitting you to carry forward unused caps for up to five years, provided your total superannuation balance is less than $500,000 at 30 June of the previous year. For example, if your total before-tax contributions were $20,000 last year, you can carry forward the remaining $10,000 of the cap to the current year, allowing you to contribute up to $40,000 before tax without incurring extra tax.

This is distinct from the bring forward rule, which applies only to non-concessional contributions.

What is the non-concessional contributions cap?

The non-concessional contributions cap for 2024/25 is $120,000 per year, or up to $360,000 over three years under certain conditions. Non-concessional contributions are voluntary payments made to your super fund that are not claimed as a tax deduction and are not taxed upon entering the fund, provided your total super balance is less than $1.9 million. These contributions can also include those made by your spouse into your super account and transfers from foreign super funds.

How to bring forward non-concessional contributions

The bring forward rule allows you to use the non-concessional contributions caps from future years within a single year. If you are under 75 years old in the first year, you can bring forward the caps from the next two years, allowing you to contribute up to $360,000 in one year without being penalised. This reduces your contribution limits for the subsequent years. Essentially, as long as your average annual non-concessional contributions over three consecutive years do not exceed $120,000, you will avoid penalties.

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