October 2023: New 15% tax on superannuation member balances over $3m
Earlier this year, the Federal Government proposed a new tax on superannuation member balances over $3m. Currently, earnings are taxed at a maximum rate of 15% within the fund and the new proposal announced an increase to 30%.
On 3 October 2023, Treasury formally released the Treasury Laws Amendment (Better Targeted Superannuation Concessions) Bill 2023, the Superannuation (Better Targeted Superannuation Concessions) Imposition Bill 2023 together with explanatory materials on the issue for public consultation. Consultations close on 18 October 2023.
If passed, the Draft Bill proposes a new Division 296 in the Income Tax Assessment Act 1997 (Cth) to apply from 1 July 2025.
WHAT IS IT?
In summary, the Draft Bill proposes an extra 15% tax to apply where a member’s total super balance exceeds $3m and there has been a positive movement in a financial year in a member’s balance, adjusted for net contributions and withdrawals.
The extra 15% tax is proposed to only apply to the balance over the $3m threshold. The proposed new tax would not apply to the whole balance.
EXEMPTIONS AND NON-INCLUSIONS
If enacted, the following would be exempt from the new tax:
Child death benefit pensions;
Structured settlement member contributions; and
An individual’s superannuation balance in the year when they die.
The following amounts would not be included in the member balance calculation for the purposes of the new tax:
Foreign superannuation interests; and
Limited recourse borrowing arrangement amounts which would otherwise have been included in a member’s total superannuation balance.
CONCERNS WITH THE PROPOSAL
There are several issues with the Draft Bill in its current form. Under the proposal:
The $3m threshold does not appear to be indexed;
It appears to tax members on unrealised capital gains (such as real estate, shares and other investments);
Refunds will not be allowed in years where there are losses. However, losses may be carried forward to offset earnings in future years; and
Members will need to satisfy a condition of release before they can withdraw funds if they wish to bring their balance below $3m. Younger members will not be able to readily withdraw funds to come under the threshold, if they have a large balance.
The proposed new tax is payable by the individual and not the superannuation entity. The extra tax would need to be paid within 84 days and the member can elect to withdraw their super under a ‘release authority’ arrangement. If a member so chooses to withdraw funds to pay the tax, they must do so within 60 days of the assessment.
SHOULD I PULL MY SUPER OUT?
This is a question many clients and their advisors have grappled with as a result of the proposed changes. Clients and advisors should carefully consider their options and not hastily make decisions before final legislation has been enacted. Some issues to consider include:
Once super is taken out, it may be more difficult to put back in. This is because of restricted contribution caps and age-based restrictions.
Members are not automatically able to access super. Members must satisfy a condition of release such as turning 60 years and retiring, turning 65 years, or having a terminal medical condition.
There are revenue implications and other transaction costs on withdrawals, particularly where a fund holds shares or real estate which needs to be sold or transferred.
The tax differential between keeping assets in super and holding assets outside super. For instance, super death benefits tax is payable when super is paid to non-tax dependants such as adult children on a parent’s death, but there may be higher income tax, CGT or land tax payable if assets are held outside super.
Other issues such as bankruptcy law and estate challenge laws under which super is better protected from attack.
It will be interesting to see what the final legislation will look like after public consultation and as it makes its way through Parliament.
HAVE ANY QUESTIONS? WE’RE HERE TO HELP
Our specialist team are leaders in providing tailored superannuation advice to help clients understand their position. We work with clients and their advisors in strategising and structuring their entitlements within the bounds of the complex superannuation and taxation frameworks. The trustee must exercise their discretions in good faith including by making proper enquiries of at least the ‘main beneficiaries’ prior to distributing income. It is not simply a matter of distributing the income. Trustees should maintain evidence of such enquires made in the event decisions were ever queried. Enquiries are likely to take time and would need to commence well ahead of the end of the financial year and under tax law.