Labor fixed its super tax, but one glaring problem still remains

More importantly, both the $3 million and $10 million thresholds will now be indexed in line with the Consumer Price Index. These new rates will apply in addition to the regular 15 percent concession rate the fund currently pays on its taxable income.

Unfortunately, many headlines gave an inaccurate picture of what was proposed, claiming that there would be a 30 percent tax on balances over $3 million and a 40 percent tax on balances over $10 million.

In effect, super funds pay zero tax on members in retirement mode and 15 per cent tax on cumulative earnings. The proposal provides for an additional 15 percent gain on earnings from balances over $3 million, and an additional gain of 25 percent on balances over $10 million.

But it is wrong to define this as a 30 percent tax. For example, if a member has a balance of $4 million, only a quarter of his or her fund will be above the new threshold, and only 25 percent of the gains from that portion will be subject to the new tax.

The reasoning behind these changes was that it wasn’t fair for people to have such large balances in retirement and that taxing them would be a useful source of extra income. But as with many Treasury forecasts, the assumptions can be questioned.

The only reason people have large balances in retirement is because they take advantage of generous rules that existed years ago. Since then, major restrictions have been placed on contributions, and unless you pick an outstanding stock that’s skyrocketing in value, you’ll have a hard time reaching even $3 million.

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Make the totals: nonconcessional contributions (those made from after-tax dollars) are limited to $120,000 per year, and once your retirement balance reaches $2 million, you can’t make any more.

Moreover, high-income earners (those earning more than $250,000 per year) face a 30 percent contribution tax. This means the $30,000 they could save for retirement as a tax deduction effectively drops to $21,000.

Here’s the kicker: people with such large balances are now mostly in their seventies or eighties. Considering that a retirement member may only leave about $2 million to his or her beneficiary when he or she dies, large sums of money are likely to be withdrawn as they pass on. Super funds will then be forced to sell assets to fund these payments and pay capital gains tax in the process.

I do not accept Chancellor Chalmers’ claim that the changes would cost Australia $4 billion in taxes. The only point of a tax on unrealized gains would be to bring forward the tax that would naturally be paid over the next decade.

If your super balance is under $3 million, you won’t be affected by these changes. However, if your balance is or is likely to exceed the threshold, it would be wise to meet with your advisor well before June 2026 to understand your position and plan for the potential impact.

Given that the tax mainly applies to self-managed superannuation funds, it may be beneficial to replace some assets in the current financial year to benefit from a lower capital gains tax rate.

Noel Whittaker is the author of: Retirement Made Easy and other books on personal finance. Questions: noel@noelwhittaker.com.au