How much Superannuation is enough?
About the author:
- Author name:
- By Terri Bradford
- Job title:
- Head of Wealth Management
- Date posted:
- 22 March 2023, 7:30 AM
Labor’s proposed “Better Targeted Superannuation Concessions”
How much superannuation is enough?
It’s a common question and one many Australians ask when thinking about the type of retirement they want to plan for.
The Federal Government recently posed this question to the Australian public, throwing out a figure of $3 million. The Government is concerned there are a number of individuals who have superannuation balances well over this threshold who are receiving attractive tax concessions. Hence their proposal to introduce a tax on earnings where fund balances exceed $3 million.
Treasury has released a fact sheet on how the tax on earnings may apply, however, we are still yet to see the consultation paper which will then lead to legislation being drafted.
Here’s what we know so far
- Legislation is due to take effect from 1 July 2025.
- If a person’s Total Superannuation Balance is over the $3 million threshold at the end of the financial year, tax on the excess earnings will apply for that financial year.
- Tax will be calculated based on the difference between the person’s Total Superannuation Balance (TSB) at the end of the financial year and the start of that financial year.
- Tax will then apply to the proportion of earnings corresponding to fund balances above $3 million.
- Amounts drawn down/withdrawals will be added back to the formula. This includes pension payments where the person has a pension account.
- Concessional contributions less 15% contributions tax will be subtracted from the formula.
- Negative earnings for the financial year can be carried forward into future years to offset positive earnings, if the fund is still operating.
- A person who has multiple super funds will be able to elect the fund or funds from which the tax is paid.
- A person will have the choice of paying the tax from personal funds or from their super fund.
- It is the intent of the Government to ensure commensurate treatment for defined benefit interests. Further consultation in this regard is still being conducted.
What are our concerns?
There appears to be no allowance for regulated pension payments if a person has a retirement pension. Based on the examples provided in the fact sheet, pension draw downs and lump sum withdrawals are treated the same and added back to total super balance. The law requires pension payments to meet minimum pension requirements so we feel adding pension payments back is unfair and should be addressed.
Unrealised capital gains are also included in the total super balance calculations. This has been a very contentious issue since the fact sheet was released. Whether the government listens to feedback remains to be seen.
The $3 million cap will not be indexed so this law will capture far more people in the future than stated. Interestingly, if you consider the effective date is in 2 years’ time, the actual present value of the cap in today’s dollars is around $2.6 million depending on the discount rate you use.
It really is important for individuals to not make any rash decisions at this stage whilst detail is scant. The consultation period may bring some changes or different rules within the proposed policy so let’s wait and see how this goes before contemplating any action.
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