Better Targeted Superannuation concessions.
Discussion Group 2/72 10 August 2023.
Better Targeted Superannuation concessions.
No doubt you are getting questioned by clients your thoughts on the proposed $3M super measure. I even have clients considering reducing the balance of their superfund below the $3M threshold before it is law!
I remind them it is labour policy, but not law, we don’t even have any legislation. Also in its current form the $3M is not a cap on total super allowed.
I thought it would be helpful and interesting to examine the proposal.
Late breaking news, on 3 August, 2023 the Government announced further consultation on the proposal.
References as follows.
Treasury consultation 31/3/23 Better Targeted superannuation concessions see link and attachment;
https://treasury.gov.au/sites/default/files/2023-03/c2023-373973-cp.pdf
Government announcement 28/2/23 see link and attachment;
https://ministers.treasury.gov.au/ministers/jim-chalmers-2022/media-releases/superannuation-tax-breaks
Review papers on the announcement, too numerous to acknowledge all however the link below was very useful;
On 28 February 2023 the Government announced measures to in their words “make the superannuation system more sustainable and fairer with one modest change that will effect less than 0.5% of all Australians”.
On 31 March 2023 Treasury released a consultation paper “Better targeted superannuation concessions”
I attach the treasury release and summarise the proposed measures as follows;
• The policy will commence on 1 July 2025 and apply from the 2025-26 financial year onwards. This means individuals with a total superannuation balance (TSB) of more than $3m on 30 June 2026 will be subject to the new arrangements.
• Earnings on the part of an individual’s TSB over $3m will attract an additional 15% tax. Where an individual has multiple superannuation accounts, a combined earnings amount will be calculated.
• Earnings for this purpose will be calculated using a formula. If an individual has negative earnings for an income year, these can be carried forward indefinitely and offset against future earnings.
• The additional tax will be applied directly to the individual. There will be no change to the tax arrangements within superannuation funds.
• The ATO will collect the relevant information and calculate the tax liability. Once the ATO has calculated the tax liability, a notice of assessment will be sent to the individual. This is separate to the individual’s personal income tax. The individual can choose to pay the tax directly using personal assets or alternatively, they can choose to release money from their superannuation account.
• How the measure will apply to individuals with defined benefit superannuation accounts is yet to be determined.
• Constitutionally Protected Funds (CPFs) are not able to be subjected to tax directly due to constitutional limitations. Modifications to preserve the tax-exempt status of ‘constitutionally protected persons’ (CPP) may be required. However, such interests will still need to be counted as part of a CPP’s total superannuation balance for this measure.
• The document stresses that as the vast majority of superannuation members are unaffected by the measure the proposed approach seeks to avoid costly reporting changes that would borne by all members, this is the justification for the simplistic approach to calculation of income to be taxed.
Implementation in detail
The first test date will be 30 June 2026. The measure to apply to members of all ages. If your TSB is below $3M on 30 June 2026 you are out of the scope until the balance is tested again on 30 June 2027.
The $3M is not indexed. It applies to individuals, it is not shared between family members.
TSB is the market value of all member assets. This will place particular importance on valuations of real property or unlisted shares particularly if a member is close to the $3M threshold.
Example of exceeding $3M
Example – Balance across multiple accounts more than $3 million
Melanie is 62 and has three superannuation accounts with the following balances at 30 June 2026:
• A pension account in her SMSF with $1 million
• A second pension account in her SMSF with $700,000
• An accumulation account in an APRA-regulated fund with $2 million Melanie’s total superannuation balance captures all of her superannuation accounts. Her total superannuation balance on 30 June 2026 is $3.7 million. As this is more than $3 million Melanie will be required to pay additional tax. The tax will only be applied to the earnings on her superannuation balance over $3 million. Melanie’s superannuation balance over $3 million is $700,000 ($3.7 million – $3 million). The earnings from $700,000 will attract additional tax.
Method for calculating tax liability
Once it has been determined that an individual’s TSB exceeds the $3 million threshold for a year, earnings relating to the part of their TSB over $3 million will attract an additional 15 per cent tax.
First, earnings in relation to an individual’s total superannuation interests are calculated as the difference between their TSB for the current year (adjusted for withdrawals and contributions) and their TSB from the previous financial year.
𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 = (𝑇𝑆𝐵 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐹𝑖𝑛𝑎𝑛𝑐𝑖𝑎𝑙 𝑌𝑒𝑎𝑟+𝑊𝑖𝑡ℎ𝑑𝑟𝑎𝑤𝑎𝑙𝑠−𝑁𝑒𝑡 𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛𝑠)−𝑇𝑆𝐵𝑃𝑟𝑒𝑣𝑖𝑜𝑢𝑠 𝐹𝑖𝑛𝑎𝑛𝑐𝑖𝑎𝑙 𝑌𝑒𝑎𝑟
For example, on 30 June 2025, Sarah’s TSB is $5.5 million. On 30 June 2026, Sarah’s TSB increases to $6 million. Sarah makes a withdrawal of $150,000 during the year. Sarah’s calculated earnings are $650,000 ([$6 million + $150,000] – $5.5 million).
𝑃𝑟𝑜𝑝𝑜𝑟𝑡𝑖𝑜𝑛 𝑜𝑓 𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠=𝑇𝑆𝐵𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐹𝑖𝑛𝑎𝑛𝑐𝑖𝑎𝑙 𝑌𝑒𝑎𝑟−$3 𝑚𝑖𝑙𝑙𝑖𝑜𝑛𝑇𝑆𝐵𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐹𝑖𝑛𝑎𝑛𝑐𝑖𝑎𝑙 𝑌𝑒𝑎𝑟
For example, Sarah’s TSB on 30 June 2026 is $6 million. The proportion of her TSB more than $3 million is 50 per cent ([$6 million – $3 million] ÷ $6 million). In this case 50 per cent of the calculated earnings from step 1 will attract the additional tax.
Finally, a flat tax rate of 15 per cent is applied to the proportion of earnings attributable to an individual’s balance over $3 million.
𝑇𝑎𝑥 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑦=15 𝑝𝑒𝑟 𝑐𝑒𝑛𝑡 ×𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 ×𝑃𝑟𝑜𝑝𝑜𝑟𝑡𝑖𝑜𝑛 𝑜𝑓 𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠
For example, Sarah’s calculated earnings are $650,000, however only 50 per cent of these earnings are attributed to her TSB more than $3 million and attract the additional 15 per cent tax.
Sarah’s tax liability is $48,750 (15 per cent x $650,000 x 50 per cent).
Calculating earnings
The approach to estimate earnings seeks to be simple and minimise unnecessary or additional compliance costs by largely relying on data reported through existing arrangements.
The proposed earnings calculation involves three key components:
• Total Superannuation Balance (TSB) – An individual’s TSB is the total value of accumulation phase and retirement phase interests plus in-transit rollovers and certain outstanding limited recourse borrowing arrangements1 (LRBA) less structured-settlement contributions2.
• Withdrawals – This is intended to capture amounts which have been removed from superannuation and are not reflected in the closing TSB.
• Net Contributions – This is intended to capture amounts that were added to superannuation and are reflected in the closing TSB, net of any contributions tax.
Total superannuation balance
The TSB is an existing calculation that applies in determining eligibility for a range of superannuation measures. These include eligibility to carry-forward concessional contributions and to make non-concessional contributions.
The TSB is calculated by adding the value of accumulation phase interests, retirement phase interests, in-transit rollovers and certain outstanding LRBA’s, less any personal injury or structured settlement contributions paid into superannuation. This annual calculation relies on information already held by the ATO and information reported by all superannuation funds on an annual basis.
The accumulation phase value is a withdrawal value, reflecting the amount that would be payable if a member’s account was closed. It includes transition-to-retirement income streams that are not in the retirement phase. The accumulation phase value is separate from the retirement phase value.
In the retirement phase, the value of an interest is equal to the individual’s transfer balance except for account based pensions that are based on the current value. Debits to the transfer balance account relating to structured settlement contributions are disregarded.
The TSB includes the value of any amounts which are in the process of transferring between superannuation funds (in-transit rollovers) and are therefore not reflected in either of the accumulation or retirement phase values. Certain outstanding LRBA amounts are also added to the TSB calculation. See later in the paper.
The starting point for the earnings calculation is the difference between the TSB at the end of the financial year and the TSB from the financial year prior. The change over this period may be either positive or negative depending on the earnings generated by the fund, including all notional gains and losses.
Adjusting the current TSB to account for withdrawals and contributions
The proposed method for calculating earnings makes adjustments for inflows and outflows that impact the closing TSB either positively or negatively. This ensures changes in TSB reflect earnings generated inside superannuation.
Withdrawals
The withdrawals are added back to the current TSB. This is intended to reflect what the individual’s current TSB would have otherwise been had they not made the withdrawals. This adjustment will ensure that a decrease in the TSB as a result of a withdrawal does not represent negative earnings generated inside superannuation.
Example – Calculating earnings with a withdrawal Carlos is 69 and retired. He has a total superannuation balance of $9 million on 30 June 2025, which grows to $10 million on 30 June 2026. He draws down $150,000 during the year and makes no additional contributions to the fund. Carlos’s earnings are calculated by adding back the value of his withdrawals to his closing TSB and then taking the difference between his opening and closing TSB. 𝑬𝒂𝒓𝒏𝒊𝒏𝒈𝒔=(𝑻𝑺𝑩𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑭𝒊𝒏𝒂𝒏𝒄𝒊𝒂𝒍 𝒀𝒆𝒂𝒓+𝑾𝒊𝒕𝒉𝒅𝒓𝒂𝒘𝒂𝒍𝒔−𝑵𝒆𝒕 𝑪𝒐𝒏𝒕𝒓𝒊𝒃𝒖𝒕𝒊𝒐𝒏𝒔)−𝑻𝑺𝑩𝑷𝒓𝒆𝒗𝒊𝒐𝒖𝒔 𝑭𝒊𝒏𝒂𝒏𝒄𝒊𝒂𝒍 𝒀𝒆𝒂𝒓 Earnings = ($10 million + $150,000) – $9 million = $1.15 million
Contributions
The value of after tax (net) contributions are subtracted from the closing TSB. This adjustment is necessary to ensure an increase in the closing TSB reflects positive earnings, not amounts an individual has contributed to their superannuation account during the year.
Net contributions include SG contributions or voluntary contributions, including downsizer contributions, payment of insurance benefits for policies owned inside superannuation and transfers such as family law splits.
Contributions made by individuals impacted by this measure are generally expected to be concessional contributions, noting individuals with a TSB more than $1.7 million (or now $1.9M) are not eligible to make non-concessional contributions. As concessional contributions are subject to contributions tax of 15% contributions used in the formula are net of tax, to reflect the net amount included in an individual’s TSB. Other voluntary contributions such as downsizer contributions would also be subtracted as a net contribution in the year the contribution is made.
Adjustments where previous TSB is less than $3 million
It is necessary to adjust the calculation where an individual’s previous year TSB is less than $3 million. This may occur where an individual becomes liable for the additional tax because their TSB has grown and exceeded the $3 million threshold for the first time. The adjustment is required to ensure that the additional tax is only applied to earnings in superannuation from the part of the TSB more than $3 million.
If an individual’s TSB from the previous financial year is less than $3 million and their TSB for the current financial year (after adjusting for withdrawals and contributions) is more than $3 million, the previous financial year’s TSB will be adjusted to equal $3 million for the purposes of calculating earnings. This approach ensures that any growth in the fund that occurs below the $3 million threshold is not counted as earnings.
Negative earnings
Investment losses or fund expenses could cause an individual’s TSB to be less at the end of a financial year than it was at the end of the previous financial year. Reductions of this kind are recognised in the earnings calculation and will mean that individual has negative earnings for the financial year. Where this occurs, the amount of the negative earnings will be able to be used to offset positive earnings in future years. This will be done on a gross basis (that is, before proportioning of earnings occurs).
Negative earnings can be applied against any future positive earning, would not expire and could be applied over multiple years. Capital losses that are reflected in negative earnings can be used to offset any future positive earnings that relate to income, including rent and interest.
Earnings that are subject to the additional tax rate
The amount of earnings which correspond to an individual’s balance that exceeds $3 million will be determined on a proportional basis. The proportion of earnings will be equal to the proportion of the individual’s TSB above $3 million.
Example – Earnings that are taxed
Starting from a TSB of $9 million, which grows to $10 million, together with withdrawals of $150,000, total calculated earnings are $1.15 million. The proportion of earnings attributable to excess amounts above $3 million are calculated using the following formula: 𝑷𝒓𝒐𝒑𝒐𝒓𝒕𝒊𝒐𝒏 𝒐𝒇 𝑬𝒂𝒓𝒏𝒊𝒏𝒈𝒔=𝑻𝑺𝑩𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑭𝒊𝒏𝒂𝒏𝒄𝒊𝒂𝒍 𝒀𝒆𝒂𝒓−$𝟑 𝒎𝒊𝒍𝒍𝒊𝒐𝒏𝑻𝑺𝑩𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑭𝒊𝒏𝒂𝒏𝒄𝒊𝒂𝒍 𝒀𝒆𝒂𝒓 Using this calculation, the proportion of earnings attributed to his balance in excess of $3 million is ($10 million – $3 million) ÷ $10 million = 70 per cent. Carlos’ earnings that are subject to tax at the higher rate are $805,000 (70 per cent x $1.15 million).
Tax liability
A flat rate of 15 per cent tax will be applied to the proportion of earnings corresponding to an individual’s TSB more than $3 million. As noted above, the amount of additional tax will be determined by the ATO and levied directly on the individual. This is similar to the existing method for Division 293 tax.
The 15 per cent tax would be imposed separately to personal income tax, and it is intended that the amount of tax payable would not be able to be reduced by deductions, offsets or losses available under the personal income tax system.
Paying liabilities
Consistent with the approach taken to taxes for excess contributions and Division 293 tax, individuals would have the option of paying their liability either by releasing amounts from one or more of their superannuation interests or by paying the liability from funds held outside of superannuation.
Example – Paying a tax liability Continuing with the example of Carlos (positive earnings scenario), the 15 per cent tax is applied to his calculated earnings of $805,000. This results in tax payable of $120,750. Carlos receives the notice of his tax liability from the ATO. He has the choice to pay this amount using amounts in his personal name or release money from his superannuation account. He elects to pay the amount from his superannuation account by completing the election form. The ATO requests the release of $120,750 from Carlos’ superannuation fund.
Defined benefit interests
The Government intends for broadly commensurate treatment to apply to defined benefit interests relative to non-defined benefit interests. This will require modifications to the general approach outlined above as defined benefit interests have different characteristics to defined contribution schemes.
The issues
Many aspects of the proposed measure have been called out as not being fair or equitable some of the points raised from my research are as follows:
Determination of ‘earnings’
The new measure cannot be described as a “30% tax on earnings over $3m”. This is because ‘earnings’ for the additional tax is not based on the fund’s taxable income. An additional 15% tax is applied to ‘earnings’ determined by a formula based on the movement in an individual’s TSB in the financial year, adjusted for withdrawals and contributions. This results in tax being applied to net unrealized gains – a concept that has been called out by industry.
See link below to an article by the Centre for independent studies which slams the proposal and questions its justification, challenges the design and undermines the logic for the change.
Think tank slams government’s $3m super tax proposal – SMSF Adviser
Indexation
The measure is not indexed and over time more funds will be captured by the measure.
Is it even necessary?
Using very simple maths and contribution of $27,500 less 15% tax per year for 40 years at 5% compound earnings provides a total benefit of just under $3M in today’s dollars. I know simple and allowable contributions likely to increase but does a young person put in the maximum from day one?
Co-incidence I get $3M? Probably!!
Does it include foreign superfunds?
Some conjecture on this and some commentators believe it does. If so where will information be sourced?
Insurance proceeds and family law splits
There was a concern that where an individual’s interest was increased by insurance proceeds, or a family law split that this could result in:
1. The individual’s TSB on 30 June exceeding the $3m threshold, because of these payments; and
2. An additional 15% tax being effectively applied to non-assessable amounts.
It appears that the consultation paper addresses this by treating these amounts as contributions, for the purpose of the calculation of ‘earnings’. After tax (net) contributions are subtracted from the individual’s closing (30 June) TSB to ensure an increase in the TBS for the relevant financial year reflects positive earnings, not amounts and individual has contributed. In relation to what is treated as net earnings, the consultation paper states:
“Net contributions include SG contributions or voluntary contributions, including downsizer contributions, payment of insurance benefits for policies owned inside superannuation and transfers such as family law splits.”
Consequently, insurance proceeds and family splits would not be included in the ‘earnings’ amount.
LRBA. Mentioned without detail in the proposal.
The impact of the government’s proposal on limited recourse borrowing arrangements (‘LRBAs’) in SMSFs – an article from NTAA.
Under the existing law, where an SMSF has an LRBA entered into on or after 1 July 2018, a member’s share of the fund’s outstanding LRBA at the end of each year may need to be added to their TSB at the end of each year. This add back will generally be required where:
• the member’s interest(s) in the fund are supported (to some extent) by the asset(s) that secures the fund’s borrowing; and
• either, the LRBA is with an associate of the fund or the member has satisfied a condition of release with a nil cashing restriction (e.g., ‘retirement’ or ‘reaching age 65’).
The government’s original intention with adding back an individual member’s share of an SMSF’s LRBA to their TSB was to ensure that an individual’s TSB more accurately reflects the overall values of fund assets supporting their super interests. Under the existing law, an individual’s TSB has been relevant and integral for accessing a range of superannuation concessions (especially being eligible for an annual and/or bring-forward non-concessional contributions cap). However, with the introduction of the proposed 15% additional tax from 1 July 2025, having to add back an individual member’s share of an SMSF’s outstanding LRBA to their TSB could cause the individual’s TSB to exceed $3 million, resulting in a liability for the 15% additional tax. The NTAA believes that this is an unintended consequence of the government’s proposed measure. On this basis, the NTAA submits that the government should exclude LRBA amounts from an individual’s TSB for the purposes of applying the proposed 15% additional tax.
Questions/comments/discussion.
Steven Coffey
10 August 2023