Words on Tax Changes in Super

In this episode of Words on Wealth, Senior Strategy Advisers Ishara Rupasinghe and Daniel Gumley unpack the likely introduction of Division 296 — the proposed extra tax on super balances above $3 million. They explore potential strategies to soften its impact, including rebalancing between couples and planning for defined benefit pensions. With legislation still pending and many details yet to unfold, what might these changes mean for your super strategy.

This episode is also available on Apple Podcast. 

Ishara Rupasinghe

Hello and welcome to Words on Wealth. I’m Ishara Rupasinghe, Executive Director and Senior Strategy Advisor at Evans and Partners in Canberra. And today we’re going to unpack the latest developments following the federal election and what they mean for superannuation. Now with Labor securing another term in government, the proposed tax on larger super balances is back on focus. And our guest today is Daniel Gumley, a Director in our Melbourne office and also a Senior Strategy and Investment Advisor. Welcome Daniel.

Daniel Gumley

Thanks Ishara, great to be here. Well, as you said, the $3 million super tax or division 296 tax as it’s known is back on the table after the election and it’s now looking far more likely to go through, I’d say, given the makeup of the Senate moving forward or what it’s likely to look like with Labor ⁓ more than likely having enough votes to push this through with the support of the Greens. ⁓ There’s still uncertainty, of course, especially since the Greens have previously pushed for lowering the threshold from $3 million to $2 million, something that Labour hasn’t agreed on.

Ishara Rupasinghe

Exactly and look even if the legislation passes unchanged the tax payable will depend on super balances as of 30 June 2026 so there’s you know we still have a little bit of time on our hands but what should people be doing now that’s what we’re here to break down for you today and what are some of the strategies you can do to prepare or minimize the impact of these new proposed taxes. Now a good place to start I think is reminding everyone what these proposals are all about. If the legislation passes, it’ll introduce an additional 15 % tax on earnings and capital gains for super balances over $3 million. And that’s starting from 1 July 2025. It’s expected to impact around 80,000 Australians. So just that ⁓ super fund members who have over $3 million. Now remember under the current rules the maximum tax rate on super earnings is 15%, but under these changes, individuals with those higher super balances could pay up to 30 % tax on their superannuation earnings and capital gains. I think perhaps the best way to demonstrate how this could impact someone is perhaps through an example. Daniel, could you take us through one?

Daniel Gumley

Definitely. Now, I thought we’d start with an example of Andrew, who’s got three and a half million dollars in super at 30 June 2025. Now let’s assume that over the next year, his balance grows to $4 million through investment earnings and unrealized capital gains. Now, if Andrew hasn’t made any contributions or withdrawals, his calculated earnings for the year are $500,000. Now, because 25 % of his balance is above the $3 million threshold, that means that 25 % of his earnings or $125,000 will be taxed at that extra 15 % tax rate. Now what that means is that Andrew would owe an additional $18,750 in tax, which he could either pay personally or from his super fund.

Ishara Rupasinghe

Now what’s interesting here I think Daniel is if Andrew made a withdrawal, significant withdrawal before the end of the year and his balance dropped below three million he wouldn’t be required to pay Division 296 tax. Now of course this opens up a range of potential strategies for those with balances around that three million dollar mark. Now the contentious issue here is that unrealised capital gains count as earnings for tax purposes. So if a superfund doesn’t have enough liquidity to cover the tax bill, maybe that requires a forced sell down of assets or it requires the tax to be paid personally and that of course can have some cashflow issues.

Daniel Gumley

Definitely, and there’s also that potential for some double taxation as well, which is a particularly controversial part of this proposal, particularly where an asset is taxed on unrealised gains, but then later results in losses. And this is exactly why those that think that they’ll be affected need to start planning now and start to consider their situation as soon as possible. If you can try and understand how these changes may impact your super balance and tax obligations, hopefully that’ll help you to avoid any surprises down the track.

Ishara Rupasinghe

And look, while we’re on the topic of contention, we’ve got to point out that unlike other tax schemes, there isn’t actually an allowance for an offset in years where there’s a loss. So if we take your example, Daniel Andrew, who’s got 4 million in super, if in the following year his balance falls back to 3.5 million, unfortunately he doesn’t now have $500,000 loss that he can use to offset future gains. Now because his earnings in this calculation are negative, it’s just that his Division 2 tax bill for that year is zero. So obviously this method keeps things quite simple for the ATO, but it’s not ideal for super members that have balances that fluctuate, which of course can happen when you’re invested in growth assets and there’s market volatility like we’ve seen recently. So look, I think before we get into sort of the planning side of it, I think it’s important to talk about what happens to those individuals with defined benefit pensions like CSS and PSS. Remember, defined benefit pensions do count towards someone’s total super balance, and currently the way that happens is the gross annual pension is multiplied by a factor of 16 to come up with a lump sum, and that’s called the special value. Now this is what counts towards both the pension balance transfer cap and the total super balance cap. Now for example, let’s take someone with a defined benefit pension of 100,000 per year. Under the current rules, that pension is valued at 16 times 100,000 or 1.6 million for the purpose of determining their total super balance. Now, the new legislation proposes to adopt what’s widely considered a more accurate family law value of ⁓ total super balance calculations instead of that historical 16 times that we’re all used to.

Daniel Gumley

And the family law value for a defined benefit interest is calculated using regulations from the Family Law Act, which set out both the methodology and a range of factors that need to be considered. So for pensions, the concept is the same as the method used to calculate that transfer balance cap amount that you may be more familiar with. And that’s the annual payment multiplied by a factor. But… The factor is actually much more nuanced. It’s not just a factor of 16 for everyone regardless of age as it was when the transfer balance cap legislation was introduced in 2017. It also depends on the features of the pension. For instance, younger people have higher factors and older people have lower ones, recognising the fact that a defined benefit pension really declines in value as a member gets older and when they have fewer years left to receive their pension. Males have shorter life expectancies than females, so there are different factors for each gender. There are add-ons to the factor if the pension’s reversionary, meaning it will continue to a surviving spouse when the original pensioner dies, which also makes sense if the pension’s worth more. And different factors also apply depending on the extent to which the pension’s indexed in the future. For example, the pension that goes up with CPI is going to be worth more than a pension that’s non-indexed and doesn’t change over time.

Ishara Rupasinghe

I mean, certainly clear that it’s ⁓ going to have significant implications because for some people their defined benefit valuation could end up greater than their current valuation and not only does this mean paying potentially extra tax, there’s broader implications to things like contributions, what happens to the other super accounts this person might have, etc. So it’s going to require very careful planning, particularly if you’ve got a defined benefit. And with that, think Daniel – Probably a good time to take us through maybe some practical examples or an example of a strategy that could be implemented, perhaps between members of a couple that might ⁓ help reduce the impact of these new rules.

Daniel Gumley

Definitely. So let’s go back to Andrew that we spoke about earlier and let’s assume that he has a spouse, Mary, who has $1 million in her super account. Now working with a strategic advisor, Andrew and Mary may be able to implement a withdrawal and rebalance strategy over time ⁓ where basically you withdraw from Andrew’s account to reduce his balance as close to and ideally below the $3 million threshold and re-contribute some funds to Mary’s super account to increase her balance. Now there’s some conditions that have to be met to make withdrawals and contributions and because of the contribution caps, this sort of rebalancing strategy would need to be repeated over multiple financial years for many people. You can also consider other ways to equalize super balances such as spouse contributions or spouse contribution splitting strategies that are available. For younger members who are making concessional contributions to super where they don’t yet have access to their superannuation. Now these types of strategies can be done overall and this would allow a couple to potentially optimise the set up of their super accounts so that they’re paying no more than 15 % tax on earnings by maximising their individual super balances as a couple.

Ishara Rupasinghe

That’s quite interesting because that 15 % tax is ⁓ generally, I’d say, much lower than what most people would pay personally. So certainly if that planning can be done ⁓ over the course of your working life, that could be a much better outcome in terms of these new rules. But I think what we’ve got to remember is that the 15 % tax on earnings applies to money left in accumulation phase, but in fact each person can have up to 1.9 million in the pension phase where earnings are completely tax free. Now this cap is soon to increase to 2 million from 1 July, so a couple starting pensions for the first time after 1 July could have a combined balance of up to 4 million invested in a completely tax free environment, which makes Super still a very tax effective place to invest. Now, if you’re not yet at the 3 million dollar mark you of course might reach this by retirement and given there’s no indexation on the three million, we’re likely to see more people reach this limit over the coming years. And here’s another thing to consider, even if your individual balance is under three million, if you’re part of a couple and one partner passes away, leaving their super to their spouse, the resulting total super balance for that surviving spouse could easily tip over the cap. So for people in this situation or really any individual who can’t rebalance with a partner, we’d be looking at other strategies to minimise the tax impact. Daniel, in your role as an advisor, you would have certainly taken people through some of these strategies. Can you take us through some of the things you might be considering for your clients in this situation?

Daniel Gumley

Yes, certainly. what I might do is I’ll use another example to help explain some of the options that I’m looking at with my clients. And I’ll use Sue this time as an example. Now, let’s assume that Sue has $1.7 million in accumulation phase within her superannuation account. She’s recently received a death benefit income stream from her late husband with a balance of $1.5 million. Now, Sue has a total super balance of $3.2 million after this inheritance. And that means under the new rules, there’s effectively three buckets for her super. We’ve got the one and a half million dollars in pension phase where earnings are tax free. We’ve got the one and a half million dollars in accumulation phase where earnings are taxed at up to 15%. And then the remaining $200,000 that sits above that three million dollar threshold sits in accumulation phase, but earnings are taxed at a total of up to 30%. Now Sue can’t rebalance her super because she’s on her own, but I would be considering whether it makes sense to withdraw the $200,000 or ⁓ even a bit more to bring her below the $3 million. And if she does withdraw her balance, ⁓ she can start to look at what are the right options to invest those funds personally instead of within superannuation. Now investing in her personal name, the investment earnings would be taxed at her personal marginal tax rate. And if she has no other income, then she’d be paying less than 30 % tax on earnings. So this could be quite a good outcome. Now remember, she does have her tax-free threshold available, which is $18,200. And the effective tax-free threshold for some individuals can be up to as high as $35,000 per year, depending on what tax offsets apply. Now, if Sue did have other income, say from a taxable defined benefit pension or rental income from an investment property, then investing this withdrawal personally might not be the best option for her to manage her tax. She might be better off leaving the funds in super. Or we might be better off considering a different entity to invest through, such as a trust, which could allow her some broader tax planning opportunities to split income amongst other family beneficiaries, whether it’s adult children or grandchildren. Typically, the ability to allocate income to adult beneficiaries can provide a tax benefit to families who do use a structure like a family trust. Now, ultimately, which option is right depends on individual circumstances, tax rates, and there are a significant range of factors to consider.

Ishara Rupasinghe

Exactly, Daniel. mean, that’s ⁓ clearly obvious from that example as well. And ultimately, the tax on investments outside of super is going to depend on the type of entity you invest in, as you said, trust, company, personal name, that sort of thing. And that’s going to be really another area to focus on for those who might be planning to or might end up having to take some money out of super.

Daniel Gumley

Yeah, clearly there’s a lot to unpack with these proposed tax changes and the key takeaway really for our clients at this stage is don’t panic. There’s still time to plan. There’s nothing to be gained by rushing to withdraw your super balance now. That’s not necessary. We do need to wait to see this proposal legislated before taking any drastic action and ensuring that you consider your circumstances carefully and seek advice if required will put you in the best position for the long term.

Ishara Rupasinghe

Yeah, exactly Daniel. And the other important thing to remember is that your total super balance, like I said, won’t be assessed for Division 296 until 30th of June, 2026. That means we have all of next financial year to work through these sorts of strategies and prepare. And when it comes to timing, things, as you said, are still up in the air. Look, normally Parliament sits in three main periods, autumn, the budget and spring, but of course we had the election, the budget was handled earlier in the autumn sitting leaving the usual May June budget period open.

Daniel Gumley

So at the end of the day, unless Prime Minister Albanese decides to bring parliament back early, we might not actually see this bill move until August. And that’s when the government will need to start negotiations with the Greens to get it through the Senate, since Labor don’t have the majority in the upper house. And the Greens have previously raised concerns about borrowing arrangements within Super, even pushing for them to be banned. They’ve of course mentioned that they want to bring the threshold down from $3 million to $2 million. it’ll be important to see how these negotiations play out and what bargaining chips may be used.

Ishara Rupasinghe

So really at this point then Daniel, it’s looking more like a matter of when rather than if Division 296 will be introduced. But obviously we’ve got time on our side. I think the focus as you said should be on planning ahead rather than reacting too soon. It’s clear that there are a lot of intricate details to work through when strategising so it’s something people should really be doing with an expert. Evans and partners of course will be keeping a very close eye on developments and letting our clients know if there are any updates. But for now, the best approach is I think to stay informed and start planning with your advisor for when the changes do come into effect. And with that, look I think that’s a good point to wrap things up on. Thank you very much Daniel for discussing this with me and sharing your insights. Thanks everyone for tuning in. If you want to hear more on these types of topics, don’t forget to subscribe.