You’ve probably heard there are going to be changes to our superannuation system.
The federal government has proposed a cap on tax concessions, which means Australians with high superannuation balances will be paying more tax.
It’s likely about 80,000 Australians will be affected, for now.
So what exactly are the changes and what do they mean for you?
It’s all about the tax you pay on investment earnings
Let’s break it down.
Currently, when you’re still working and adding money to super (called the accumulation phase) the earnings from your super investments are taxed at 15 per cent.
As part of the proposed changes, the tax rate on earnings will double to 30 per cent for super balances above $3 million.
It’s initially likely to affect just 0.5 per cent of Australians with super accounts.
They will still pay a 15 per cent tax rate on earnings on their retirement savings up to $3 million, but will have to pay the higher tax rate on the remainder.
“It’s not a major change to the superannuation system,” Treasurer Jim Chalmers told ABC News.
“It leaves all the fundamentals in place. Everybody can still access generous tax concessions in the system.”
Wait, I’m confused. How is my super taxed?
Usually, the money you put into super and the earnings you make on your investments within super are taxed at a lower rate than your regular income.
The system was designed like that to encourage people to save for their retirement and reward them for doing so.
There are three times you may be taxed: on the money you put into super (contributions); the money you earn from your investments in super; or money you withdraw from super (typically, retirees pay no tax).
Here’s how much tax you typically pay:
| Type of tax | Amount |
|---|---|
| Concessional contributions (these are before tax and include super your employer pays and any super you salary sacrifice) | 15% |
| Non-concessional contributions (these are after tax and are extra savings you put into super) | 0% |
| Contributions from high income earnings (on contributions over the $250,000 threshold) | 30% |
| Investment earnings (currently) | 15% |
| Proposed change to investment earnings for accounts bigger than $3m | 30% |
| Withdrawals (if under 60yo) | 17-22% |
| Withdrawals (when you’re in the retirement phase and are over 60yo) | 0% |
I’m retired. Will it affect me?
It depends.
That’s because of another confusing part of super called the transfer balance cap. This is the amount of money you can transfer into a tax-free account when you reach retirement age.
It was introduced by the Turnbull government to limit tax-free super balances and was originally set at $1.6 million.
If your super balance is under the transfer balance cap (which is currently $1.7 million) the proposed change won’t impact you.
Retirees with much higher balances will have a more complicated system.
“What they’re basically bringing in is a three-tiered super tax rate,” explains Curtin University’s tax expert Helen Hodgson.
“Effectively, you pay zero per cent tax on anything you put into the retirement phase, up to the $1.7 million transfer balance cap.
“Then you’ve got money you can keep in the accumulation phase, being taxed at 15 per cent. Then once you hit the $3 million mark it’s taxed at 30 per cent.”
| A three tiered system for earnings | Tax rate |
|---|---|
| Up to $1.7 million into the retirement phase | 0% |
| Up to $3 million remaining in the accumulation phase | 15% |
| Over $3 million in the accumulation phase | 30% |
Will the $3 million cap be indexed?
No.
The Treasurer says he does not intend to index the $3 million cap.
(If you’re wondering, indexation just means adjusting the amount based on something like inflation).
“Obviously we’re consulting on the design features,” Dr Chalmers told reporters.
“A future government may decide to change the $3 million threshold. The way I have designed it, in conjunction with Treasury colleagues, is for a $3 million threshold.
“If some future government decides they want to lift that, they can pay for that.”
If the threshold is not indexed, inflation and the compounding earnings within super will push more Australians above the $3 million balance level over coming decades.
To put it into perspective, Alex Dunnin from Rainmaker Group has crunched the numbers on which young people now might be affected by retirement age if the $3 million threshold never changes.
Or you would have to have exceptional returns every year, which is unlikely.
“Long story short, to hit the $3m cap, you either have to start by earning four times the typical salary and keep earning at that rate for the next 42 years, or you’d need to earn double the long-term average investment performance each and every year for 42 years,” he says.
Interestingly, some super thresholds are indexed while others are not.
For instance, the transfer balance cap is indexed to inflation in increments of $100,000.
So currently, the cap is $1.7 million, but that will probably increase to $1.9 million in July this year.
“In theory, the $3 million probably should be indexed to take into account inflation over time,” says Mr Dunnin.
“But we don’t index tax brackets, so let’s just see how the legislation ends up.”
What happens next?
The federal government will introduce legislation into parliament soon.
As flagged by the Treasurer, it will also undertake further consultation with the super industry and other stakeholders.
The changes are likely to come into effect from the middle of 2025.
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I am interested to find out how defined pensions will be treated. Will the balance be calculated on the future yearly earnings? Or will they be based upon yearly earnings? If it is future earnings would those who get defined pension payments be able to withdraw the full amount and be able to leave it to their heirs, like those who do not have defined pensions? I have a feeling that this may be what happens if Labor wins the next election but the LNP take power after that, they have always targeted public service workers.