Superannuation - The devil is in the details

Superannuation changes: For many 15% tax becomes 30%. The devil is in the detail

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Changes, changes, changes

It is hard to think of any government policy that has been changed as frequently as superannuation. By now we all should be used to the continual movement of the goal posts with each federal government.

Annual superannuation changes are as certain as death and taxes. In fact, the latest changes are all about tax. You can argue about broken election promises or the chaotic manner in which the latest changes occurred. But the reality is that: it is what it is. And we will likely need to operate within these new rules (or a version close to them).

The superannuation changes explained

1. The tax rate on earnings on superannuation balances greater than $3m increases to 30%, from 15%.

2. The $3m will not be indexed.

3. The $3m refers to an individual member’s balance, not of an entire superannuation fund.

4. There are now three tax rates for earnings in superannuation:

Member BalanceTax Rate
Up to $1.7m in retirement phase0%
Amounts up to $3m in accumulation phase, also counting the amount in retirement phase15%
Over $3m in accumulation phase30%

5. The 30% tax will include CGT on realised and unrealised capital gains.

6. The current 15% tax-band will retain the 1/3rd CGT discount for securities sold more than 12 months after purchase.

7. Negative earnings in a year can be carried forward.

8. Commencement 1 July 2025.

Our analysis of the Superannuation changes

Funding the tax

Investors will have the choice of either paying the tax personally or from superannuation and for those with multiple superannuation funds, can decide from which fund the tax payment will come. This is shrewd, it allows those with lumpy illiquid superannuation assets, e.g. real estate, to finance their tax liability by using non-superannuation funds.

CGT on unrealised gains

A particularly concerning part of the superannuation changes is that the calculation of earnings includes all notional (unrealised) gains and losses. Effectively, this provides for an annual ‘mark-to-market’ of assets within the fund. This compares to including only realised gains and losses, i.e. after an asset has been sold. Taxing unrealised gains is contrary to usual tax policy.

This new policy could prove particularly problematic for superannuation funds with large illiquid assets, as well as those with lower levels of liquidity who may find themselves forced to sell assets to meet annual tax bills for capital growth which has not otherwise been realised as part of the funds normal income earnings for the year.

Q: What to do in the meantime? A: Take advice.

If you have a member balance now of over about $2.5m, you cannot afford to wait until 2025 to act and the superannuation changes come in to play. This especially applies if you:

  • Do not have a family trust or other alternative investment vehicle
  • Have large illiquid assets in your superannuation fund

A possible alternative investment arrangement of transferring high growth assets outside of your superannuation fund is one of many strategies that can be considered.

In conclusion

We will be contacting all First Samuel clients who will be affected by the legislation.

If you are not a First Samuel client but would like to discuss your wealth management needs, please get in touch.

The information in this article is of a general nature and does not take into consideration your personal objectives, financial situation or needs. Before acting on any of this information, you should consider whether it is appropriate for your personal circumstances and seek personal financial advice.

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