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Starting from 1 July 2025, the Government proposes to reduce tax concessions available for individuals whose total superannuation balances exceed $3m at the end of the financial year.
Below we examine some of the potential implications that could arise from the proposed tax on member balances exceeding $3 million:
The $3m superannuation cap is likely to see an increase in auditor scrutiny of asset valuations – particularly large illiquid assets such as property (including indirect property trust investments), and investments in unlisted companies, therefore increasing the need for suitable comparable sales data to justify valuations in view of the potential for manipulated values.
Members with balances at or above $3m with large proportions of their self-managed super fund (SMSF) invested in illiquid assets are likely to be most affected. These funds can often be asset rich and cash poor, raising concerns of inadequate liquidity within the fund to enable the additional tax to be released from superannuation. Illiquid assets can be difficult to value and may be subject to significant market fluctuations, and as unrealised gains will be taxed under the proposal, trustees may be forced to sell these assets to fund the additional tax at an inopportune time, resulting in a worse outcome for fund members. Alternatively, fund members may be forced to dip into personal funds or sell non-super assets to fund the additional tax.
Impacted individuals and their advisers may now review and consider changes to their asset allocation mix inside and outside of super, potentially moving away from capital growth focussed assets and towards more income producing assets within super to reduce the impact of the additional tax on unrealised gains, and to retain the benefit of the capital gains tax discount.
Restructuring or drawing down on superannuation balances to below $3m – where appropriate – will be more readily available for those over the age of 65 or who have met a condition of release. But what about those with greater than $3m yet to meet a condition of release to draw down their super? Will the Government allow early access under this circumstance?
Whilst no current options accommodate affected individuals who have yet to reach their preservation age, for those that have, there may be an increase in those people seeking to access their super to reduce balances and redirect funds in favour of other tax effective structures, upgrading the family home or recontribution strategies amongst family to reduce the impact of the proposed tax. Examples may include:
While the proposed introduction of additional tax on balances above $3m may encourage a shift of investment allocations, superannuation funds are still expected to be the best tax retirement vehicle for most people.
However, situations may arise where the proposals could upset the careful planning already in place for those presently funding their retirement, or members approaching retirement will have to rework their calculations.
Younger savers too – although not yet ready for retirement but with the foresight to be looking ahead – may no longer be satisfied with a strategy of just building the biggest superannuation nest egg as they possibly can given the continual shifting of the goal posts and erosion of confidence in the superannuation system.
It remains to be seen what short and long-term rationales now come into play on the retirement plans of many, from what originally has been seen as affecting only a small number of people (particularly in light of the lack of indexation of the proposed $3m threshold).
Superannuation in the early 1980s was designed to provide a tax-efficient vehicle for retirement savings, with contributions being taxed at a concessional rate and investment earnings taxed at a lower rate than personal income tax. Over time, the superannuation system has been reformed to provide a more flexible and transparent system for managing retirement savings.
According to the policy makers, the purpose of the proposed change is to address concerns the current superannuation tax system is inequitable, as it disproportionately benefits high-income earners who can use their superannuation funds as a tax-efficient wealth management strategy. However, given the policy intention, it is important this does not lead to a situation where the threshold is then decreased to target a greater number of individuals and their retirement savings.
From an industry super fund perspective, the proposed change may have unintended consequences for industry superannuation funds in Australia. Like SMSF contributions, it may result in reduced contributions to industry super funds from high-income earners who reach the proposed cap, and may also encourage these individuals to withdraw their superannuation funds early, or invest in other assets that are not subject to the same tax rules.
Also, the extra 15 per cent tax which is applied to ‘earnings’ determined by a formula based on the movement in an individual’s total superannuation balance will result in unrealised gains being taxed, and may result in administrative pain for most industry superannuation funds due to valuation issues.
Therefore, industry super funds may also face increased competition from other financial institutions or other investment vehicles that offer alternative retirement savings products and services. This could have a significant impact on the funds' revenue streams, potentially leading to a reduction in the benefits members receive.
On the other hand, the proposed changes could also create opportunities for industry super funds to differentiate themselves from other financial institutions by emphasising their unique features, such as their focus on low fees and investment in ethical or sustainable assets.
The consultation period has recently ended, with several submissions made to the government which discussed the potential impacts on retirement planning, commercial implications for businesses and financial institutions, and potential administrative complexities associated with implementing the new policy. We now await in anticipation the enabling legislation and any other information that may be released in the budget.
Overall, the $3m superannuation tax is likely to have a significant impact on individuals, SMSFs, financial institutions which offer superannuation products, and industry super funds – it will be important for these entities to closely monitor developments in this area as they unfold.
If you’d like to discuss the changes to superannuation or the outcomes from the Federal Budget, please do not hesitate to contact your local Grant Thornton superannuation team.
The above information is provided as an information service only and, therefore, does not constitute financial product advice and should not be relied upon as financial product advice. None of the information provided takes into account your personal objectives, financial situation or needs. You must determine whether the information is appropriate in terms of your particular circumstances. For financial product advice that takes account of your particular objectives, financial situation or needs, you should consider seeking financial advice from an Australian Financial Services licensee before making a financial decision in relation to any of the matters discussed.
