The Government plans to increase taxes on superannuation balances of more than $3 million from 1 July 2025.
The new tax would only apply to every dollar earned above $3 million.
Opposition to the change has been mounting, with some interest groups and MPs arguing that young people will be hit hardest by the tax changes.
Confused? Fair enough.
Here’s what you need to know about the super tax debate.
Super balances
If you’re an adult working in Australia, your boss must make contributions to your superannuation for your retirement.
You can also make voluntary payments to your super account, and you can set up multiple accounts.
In most cases, you can’t access super until you are at least 60. There are exceptions, including early retirement due to injury.
Super accounts are long-term investments. They can be self-managed, but most people leave that to a fund.
There are various types of super funds, ranging across different types of work or needs.
The funds use the super contributions to invest in a range of areas, such as property and shares.
Your overall super balance will change in value based on the returns of the super fund’s investments.
Taxing super
Super balances are taxed differently to income.
Currently, super investments are taxed up to 15% as they build up (i.e. while you are a working adult). This is known as the “accumulation” phase.
There are various tax concessions on super contributions and gains during the accumulation phase, which means not every dollar is usually taxed at 15%.
The main thing to note is that the super tax rate’s ceiling is 15%, which is lower than all current income tax brackets.
Government plans
Labor proposed reforms in 2023 to increase taxes on super balances that exceed $3 million from 15 to 30%.
The higher tax rate would apply to every dollar earned above $3 million. Treasury figures show 0.5% of people had super balances above the $3 million threshold as at February 2023.
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Labor put forward a bill during the last term of Parliament. The Greens have expressed some support for the bill, previously urging Labor to lower the threshold to $2 million.
Why?
The Government has argued that higher taxes on “large” super balances creates a “fairer” system.
In a statement, Treasurer Jim Chalmers said the higher taxes will only apply to “balances that are beyond what is necessary to fund a comfortable retirement.”
Australia Institute economist Greg Jericho has argued lower super tax rates have been used “to avoid paying tax.” He said the richest 10% of people get $22 billion in tax breaks “by having money in super rather than having it taxed like income.“
Criticism
Critics have raised two main concerns about the proposed tax.
The first is that the higher rate would also apply to “unrealised capital gains”.
This is where you are taxed for the value of a long-term investment (e.g. a property) even if it isn’t a real-time earning (e.g. a salary).
For instance: You buy a house for $1 million. Over a year, it increases in value to $1.1 million. An ‘unrealised gain’ tax is where you’re taxed on the $100,000 value increase of the house, even though you haven’t pocketed that money.
Since superannuation can invest in property (an asset that doesn’t have an immediate return) then people could be taxed for a hypothetical value increase, rather than a tangible sum of money that they receive.
Analyst Julie Abdalla from the Tax Institute said: “The angst and concern [is] about paying tax on money that may never hit your pocket.”
The Government’s explanatory note to its legislation said it could result in superannuation being used for “investing in income-generating assets, such as shares and bonds, as opposed to property”.
Indexation
The second main criticism of the increased super tax is that it won’t be indexed.
Indexation is where the value of something changes over time in line with a particular measurement, such as inflation (rising prices).
A true dollar value naturally increases over time due to inflation, meaning that more people will fall into the $3 million tax bracket over the next few decades.
Independent MP Dr Monique Ryan argues that if the threshold is introduced, the $3 million figure should be indexed.
“The lack of indexation means that it could affect all Gen Z Australians by the time they turn 60,” Dr Ryan said in a statement.
In response to questions about indexation, Chalmers said he’s taken a “consistent” approach to not index tax thresholds.
“Governments of either political persuasion into the future can take decisions to lift the threshold,” he told reporters earlier this week.
