Following the Government’s release of the 2022-23 Tax Expenditures and Insights Statement, a media release issued by ministers Jim Chalmers and Stephen Jones on Tuesday heralded the pending arrival of the highly anticipated cap on high superannuation balances.
While there are only limited details from which we can work off at this early stage, initial fears of a ‘hard cap’ targeting certain SMSFs with high balances appear to have been alleviated. These initial concerns primarily revolved around the potential for a ‘hard cap’ to force the removal of superannuation balances above a certain limit – as this risked a raft of seemingly unnecessary complexity and disruption.
Fortunately, it appears that the main issue the Government seemed to be grappling with was not necessarily the presence of large balances in the super system, but rather the tax concessions that these balances attracted.
To that end, the approach announced by Government seems to more appropriately deal with this issue – without forcing the removal of superannuation benefits or restricting the amount that an individual is permitted to save through the superannuation system.
This proposed ‘soft cap’, is instead designed to specifically target the level of tax concessions enjoyed on earnings derived by fund members with a superannuation balance over $3 million.
That is, it’s a measure that is broadly designed to double the current rate of tax paid by superannuation funds on the earnings derived by fund assets above this level – from 1 July 2025.
What we know so far
While there is some way to go before this measure is finalised and becomes law, following the release of a Treasury Fact Sheet titled “Better Targeted Superannuation Concessions” some of the details behind Tuesday’s initial announcement are starting to become a little clearer.
For example, currently, fund earnings derived by assets held in the accumulation phase are generally subject to tax at a maximum tax rate of 15% within a superannuation fund – regardless of the member’s fund balance. It appears that this will continue to be the case beyond 1 July 2025.
However, the Government’s announcement will broadly see ‘earnings’ derived by a member’s superannuation assets above $3 Million, subject to a new and additional 15% tax from 1 July 2025.
How will the tax be levied?
Treasury has indicated that affected individuals will be given a choice of either paying this tax out-of-pocket or having it deducted from their superannuation fund(s).
Further, individuals who hold multiple superannuation funds will be able to select the fund from which the tax is deducted.
What about pension assets?
It is anticipated that the tax on earnings derived by assets supporting retirement phase pensions will not be impacted by this change.
That is, we would expect that these earnings will continue to be treated as Exempt Current Pension Income (ECPI) – noting of course that the amount a member can place into retirement phase pensions is already limited by the Transfer Balance Cap (TBC).
How will this measure be implemented?
Individuals with a TSB over $3 million at the end of a financial year will be subject to this additional 15% tax on the relevant earnings (as discussed above) derived during that year.
As previously noted, this measure is proposed to commence from 1 July 2025, with application from the 2025-26 financial year onwards.
Because an individual’s TSB is measured at 30 June each financial year, this measure will first impact those individual’s whose TSB is over $3 Million at 30 June 2026.
As a result, the first tax liability notices are expected to be issued by the ATO in the 2026-27 financial year – i.e. these notices will relate to the additional tax liability incurred on earnings derived during the 2025-26 financial year.
For more information or assistance please contact Infinite Accounting Solutions on 02 9899 4730 or via the contact page at www.ias-ca.com.au.