The government has recently taken steps towards implementing significant changes to the taxation of superannuation earnings. In an effort to bolster tax revenue and ensure that the wealthiest individuals contribute their fair share, the Treasury has introduced draft legislation to increase the tax rate on earnings from superannuation balances exceeding $3 million. 

This change, if passed, will see a substantial increase in the tax rate, from the current 15% to 30%, effective from 1 July 2025.

This move is part of the government’s broader fiscal policy aimed at creating a more equitable tax system and addressing the growing concern of wealth inequality. The draft legislation represents the final preparatory step before it is presented to Parliament, indicating that the proposal is steadily advancing towards becoming law.

The draft legislation, as it stands, seems to align closely with the initial announcement made by the government. It seeks to establish a method for calculating tax on earnings that takes into account the growth in an individual’s total super balance (TSB) over the course of the financial year. 

This approach incorporates contributions, which encompass not only traditional additions but also insurance proceeds, as well as withdrawals. By capturing both realised and unrealized gains, this calculation method permits individuals to carry forward any losses and offset them against future earnings.

The responsibility for performing these calculations will be vested in the Australian Taxation Office (ATO). Importantly, this new tax regime will only apply to superannuation balances that exceed the $3 million threshold. The initial evaluation of TSBs surpassing this limit will occur on 30 June 2026, with the first assessments anticipated to be issued in the 2026-27 financial year.

For those who have super balances that are in proximity to or exceed the $3 million threshold, careful planning and consideration of the implications are crucial. It is essential to recognize that there is no one-size-fits-all approach to dealing with this change in tax policy. 

The most suitable strategy will depend on individual circumstances and financial goals. It is advisable to seek professional financial advice to tailor an approach that aligns with your specific needs.

Super, despite the impending increase in the tax rate, remains a tax-efficient vehicle for retirement savings. The benefits of superannuation, such as the concessional tax treatment on contributions, the ability to enjoy tax-free withdrawals in retirement, and the potential for favourable investment returns, make it a valuable tool for building long-term wealth. 

Thus, while the tax rate is set to increase significantly for those with superannuation balances above $3 million, it is essential to recognize that superannuation, overall, continues to offer attractive tax benefits compared to other investment options.

In conclusion, the Australian government’s move to increase the tax rate on super earnings above $3 million is poised to impact high-net-worth individuals and will necessitate careful financial planning. 

The draft legislation, now in its final stages, seeks to ensure that the wealthiest individuals contribute more to the nation’s tax revenue. Despite these changes, superannuation remains a tax-efficient vehicle for retirement savings, and individuals should explore personalized strategies to navigate this evolving financial landscape. Consulting with financial professionals is advised to make informed decisions that align with individual circumstances and goals.

The Australian government’s decision to increase the tax rate on superannuation earnings for high-income individuals represents a significant step in their ongoing efforts to address wealth inequality and enhance tax revenue. The proposed change in tax policy, scheduled to take effect from 1 July 2025, will see the tax rate on superannuation earnings exceeding $3 million double from the current 15% to 30%.

This initiative is part of a broader fiscal strategy aimed at promoting economic fairness and ensuring that the wealthiest individuals contribute their fair share to support government programs and services. The draft legislation, which is currently in the final stages of preparation, is set to undergo parliamentary review and approval.

The key feature of the draft legislation is the method used to calculate tax on superannuation earnings. It accounts for the growth in an individual’s total super balance (TSB) throughout the financial year, considering contributions, withdrawals, and insurance proceeds. 

This approach, inclusive of realised and unrealized gains, allows individuals to offset losses against future earnings. The Australian Taxation Office (ATO) will be responsible for conducting these calculations.

One notable aspect of this new tax regime is its applicability. It will only affect superannuation balances exceeding the $3 million threshold. The initial assessment of TSBs surpassing this limit will occur on 30 June 2026, with the first assessments set to be issued in the 2026-27 financial year.

Given the implications of these changes, individuals with superannuation balances near or exceeding the $3 million threshold need to engage in thoughtful financial planning. There’s no one-size-fits-all approach, and the most suitable strategy will depend on individual circumstances and financial objectives. Seeking guidance from financial professionals is recommended to create a personalised plan that aligns with your specific needs.

While the tax rate for high super balances is increasing significantly, it’s crucial to recognize that superannuation still offers numerous tax advantages. These include favourable tax treatment on contributions, the ability to make tax-free withdrawals during retirement, and the potential for attractive investment returns. 

Despite the forthcoming tax hike, superannuation remains an efficient vehicle for long-term wealth accumulation compared to other investment options.

In summary, the Australian government’s move to raise the tax rate on superannuation earnings above $3 million represents a step towards promoting fiscal equity and increasing tax revenue. 

The draft legislation, nearing its final form, aims to ensure that the most affluent individuals contribute more to the country’s finances. Although these changes necessitate careful financial planning for high-net-worth individuals, superannuation continues to offer tax benefits, making it a valuable tool for long-term retirement savings. 

To navigate this evolving financial landscape, consulting with the superannuation experts at Bates Cosgrave is crucial for making well-informed decisions that align with individual circumstances and financial goals.