HAVE TO KNOW: Extra tax in super 


HAVE TO KNOW: Extra tax in super 

Today we will chat about the hottest financial topic in Australia: Extra Superannuation Tax that Labor is introducing from 1st July 2025. Even if this changes does not affect you, please stay with me here, as I think this is one of the most important topics you really need to understand and make your own decision which way you are willing to proceed in the future.

Only three months ago I wrote an article: “Extra Superannuation Tax for the Wealthy” in which I introduced the planned change by Labor to remove the concessional tax rate for super funds above $5mil in total value.

In overwhelming numbers, you voted that this is a good change, and the Wealthy should pay a higher tax.

Now Labor has returned with the set policy, that is going to commence in 2025/26 financial year with rules completely changed. The balance is no longer $5Mil, but $3Mil, which obviously will impact more Australians and more super funds will be caught within that change.

Maybe that change is not affecting you now, but please be open minded to see where we are heading with the superannuation system in the future with this change and I am sure new to follow, as history is already showing, and it is not pretty.

So today I will explain the new change introduced by Labor, that will affect more people than you might think, and the way it is explained to you by our government.

Unlike your income tax, that is calculated on a sliding scale as per table showing:

Superannuation pays a flat tax rate of up to 15%. I say up to, because if you invest portion of your savings into Australian Shares, franking credits paid on those share dividends will reduce the tax bill that your superannuation pays on earnings. 

This strategy is available to every single person, tax management is open to every single Australian. I don’t understand the argument that “rich people get advice therefore they know how to avoid tax”. First of all, no accountant or financial planner will ever recommend tricks for tax avoidance, as it is illegal. However, strategies for legal ways of tax minimisation are available to every single person, it is just that wealthy people don’t mind paying for a good advice, this is why they created wealth. 

So, if you have a choice to pay only 15% tax on earnings rather than your marginal tax rate, it is pretty obvious what is a good and profitable choice. This is how superannuation became so popular, and almost every working person in Australia contributes extra to super, not because it is a great investment vehicle, but due to its concessional tax rate. 

But now the government is going after all super funds with values over $3Mil. The plan is to make all those super funds pay additional 15% tax on earning on balance above that $3mil. This new plan is to be introduce in 2025/26 financial year. 

OK, so before you make your decision whether this is a good or a bad measure, let’s look at this rationally and analyse it together and then you can make your own judgement. 

How many people do you think will be affected? 

Within the last group, there are 17 people with over $100mil in super and one with over $400mil. That is a lot of money and a great retirement.

But before we get angry, let’s put emotions aside and just look at legislation, superannuation and super contributions need to meet the sole purpose test to be eligible for concessional tax of 15%. The sole purpose test means that your fund is for the purpose of providing retirement benefits to members or to their dependents if a member dies before retirement.

This is the rule for a big public offer fund or a small self-managed super fund (SMSF).

So it could be argued that nobody really needs $100mil in a super to provide for their retirement.

It is not the purpose of the super fund to provide a tax-effective vehicle to pass wealth to the next generation.

But if the government expects people to follow this rule, comply and respect  the sole purpose test, then the same rule should apply to the government.

If the superannuation savings are solely for the purpose of building your retirement nestegg, by law it is not for the purpose of the government helping itself to your money anytime it has a whole in the budget and with your money try to solve the national housing problems or infrastructure problem.

If it is coming to the point of you having no say how supposedly your money is invested, but is being misused by the government for their own political agenda, this is just not right and it is against the principal rule of superannuation legislation: sole purpose test, that I’ve just explained.

But believe me, it gets worse.

If you are as crazy as I am and you follow government papers, you can read the latest Consultation Paper dated 20 February 2023: “Legislating the objective of superannuation”If you wish to read the full statement, visit my website AboutRetirment.com.au you can find the link to this Consultation paper:

In order for the Labor party to do with your super money whatever they want, they actually changed the proposed objective of the superannuation fund therefore fundamentally changing the sole purpose test.

On page 9 it reads:

 The objective of superannuation is to preserve savings to deliver income for a dignified retirement, alongside government support, in an equitable and sustainable way” 

You can put beautiful words into anything you want to express it in a way it sounds as a good and caring measure, but let’s see what that really means:

I am quoting:

1. “Preserve savings – restricts access to superannuation savings for a person’s retirement only”.

Have you noticed how with time, your access to super is further and further away into your late 60s? I am sure that with another superannuation change, your preservation age will be delayed, your access to your super will be delayed, while in the meantime the government will help themselves to your money. I know our life expectancy is getting longer and longer, hence more people live longer, but there are still those, that actually want to retire at 55 or 65. So why you cannot access your own money at the time you wish to retire, if you have enough in your super to support you for later years?
Also, the statement says: “for person’s retirement only” – have they forgotten about the death benefit? what happens to my money if I die? Very unclear and frankly a worrying statement.

2. Deliver Income – emphasizes the principle of superannuation to provide income in retirement”

Sounds good you say? Well what about if you need to withdraw a lumpsum, part or all of it? Will you be able to do this? will you have access to your super savings outside of the income stream? All super funds will love that idea, huge and very secure business for them, but what about you having access to your own money?

3. “Dignified – denotes the importance of financial security and wellbeing in retirement”
Those are some big words that the government is using here, so let’s combine it with the next statement:

4. Government support – intends to encapsulate and highlight the superannuation system’s interaction with the Age Pension pillar, as well as other government support”

The truth is that our existing smart superannuation system will assist the government to reduce costs of Age Pension to the public with time. More and more people approaching retirement have had their super fund running for longer than the generation before. Your employer contributions together with your salary sacrifice, that we do to save ongoing income tax, plus additional personal contributions over time, build superannuation balances that are slowly putting people outside of Age Pension eligibility. Therefore government doesn’t need to do much, just wait patiently for more years, and our own super savings will cancel out your eligibility under the Assets Test.
And that’s OK, we want to be a wealthy nation, but if the government is able to save money on Age Pension front, maybe other benefits should be increased, especially for people in real need?

5. Equitable and sustainable – signifies that the system should provide similar outcomes for people in similar circumstance and government support should be targeted to those in need. Superannuation also needs to fit within the broader fiscal strategy”.

Again, lots of big words, if the government was to really support those in need, it is enough to increase the tax-free threshold, this would help those in need, or increase the rental assistance payments, those are at ridiculously low levels not updated in years. Why not put more resourced into Centrelink to actually really help Australians, to have applications processed in a matter of a week and not months, why not improve our medical system where people are on waiting lists for months living in pain. There are lots of ways to improve lives of people who really need assistance, but not by controlling all retirement savings for government’s own benefit.
And the last sentence really worries me: “superannuation also needs to fit within the broader fiscal strategy” this is a beautiful gateway to open superannuation to tax meddling as much and as often as the government pleases, making superannuation a very unstable and unreliable system.

As you can see there is lots behind the scenes, not just increase of tax for super balances over $3Mil. In general terms you might think that the extra tax is fair, and people who have that much in super should pay that extra tax, but….. This number is not subject to indexation, and this is the main issue that you should really take into consideration.

Introduction of this policy may not impact you directly, and the government advertises that this change will only affect approximately 80,000 people, not a big number, but will bring the additional tax revenue of $2Bil. So why should you care?

Well, as I said the worrying fact is that the $3Mil limit is not indexed, therefore it stays put and will not increase with inflation. This will impact terribly on your children and your grandchildren financial wellbeing.

The limit of $3mil with inflation running at average 4.5% will equal to:

Can you see how with each passing year, that new tax will apply to more and more people, especially considering that your kids or grandkids, when they start work, they have super from day one. Most likely you haven’t.

Therefore if this measure goes through, with time, everyone will be affected, therefore superannuation will no longer be a good retirement savings vehicle, as it will no longer be tax effective, but in addition there is this great worry of the government control over your money to the degree you may not like at all. 

So super and pension system continues to be great for baby-boomers and for your retirement, but I think people who are younger should start reconsidering extra super contributions and find other investments vehicles that are within your control and your choice. 

I hope that after my long explanation, you can see how this new superannuation tax on wealthy is supposedly impacting only 80,000 people. Yes, 80,000 today and many, many more into the future. 

On 30th March 2022, there has been $3.5 trillion invested in our superannuation system. It is just too much of a good thing for the government to ignore and not to play with it, to get their portion of your money, to cover holes in their budgets and to use funds for their own government projects. And this is a very worrying trend. 

I’ve noticed that some people will email me directly. If you don’t receive a reply form me, this is not because I disregard you, but often emails end up in my junk mail or sometimes can be stopped by a spam filter.

So if you have not received the reply, either organise a meeting or just call our office to book a meeting at the suitable time for us both. 

By: Katherine Isbrandt CFP®
Money Strategist & Retirement Planner
Principal of About Retirement

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