Squiz Shortcuts - The super tax debate

Your Shortcut to… The super tax debate

Superannuation has been coming up in the headlines a bit recently, with an increase in tax on super accounts set to affect some of the wealthiest Australians - at least, in the short term… But some experts are concerned that over time, it could impact millions of us… So in this Squiz Shortcut, we’ll explain:

• what the changes are

• how they’ll be applied

• and why they’ve sparked such a big debate.

Prefer this in your ears?

Listen to our podcast 🎧

Listen time: 8 minutes

Squiz the Shortcut

Remind me what the whole idea behind superannuation is?
Superannuation is a mandatory savings scheme to help Aussies prepare for their retirement when they can’t, or no longer want to, earn an income through work.

How does it work?
Employers direct a percentage of their staff’s wages into a nominated super fund each pay. Superannuation funds invest the money in their members’ accounts for them, and over time the balance grows. Most Aussies can’t access the money until they’re over 60yo, and it’s considered to be a smart way to save for retirement because the contributions are taxed at a lower rate than people’s standard incomes.

What’s the tax rate?
Earnings each year in super account balances are taxed at 15%… And withdrawals from super accounts after the age of 60yo are tax-free. So, Aussies are encouraged to pour extra savings into their super above and beyond what their employers put in.

What’s the thinking behind that?
Well, it not only helps with financial security in retirement, but it also builds wealth and stability, and it helps lessen the burden on the government by reducing the reliance on pensions. 

What’s the average balance of Aussies’ super accounts?
Around $150,000 but some accounts have tens of millions of dollars in them - and the government sees these bigger accounts as pushing the friendship on the tax benefits given to super accounts, and it says it wants to make things fairer.

You mentioned some changes to the way super is taxed; what’s in store?
The changes take effect from 1 July, and one of them is that employers will be increasing mandatory contributions from staff’s salaries to their super accounts from 11.5% to 12%. So if you’re employed on a salary, you’ll see a small drop in the money you get in your hand. But that’s not the change that’s ruffled feathers…

I’m listening…
What’s set the cat among the pigeons is a new tax on super accounts that have a balance of more than $3 million. From 1 July, those accounts will pay 15% on earnings as usual, plus an extra 15% for earnings on the portion of the balance over $3 million (so, effectively 30% on that part). To be clear, this is during what’s known as the ‘accumulation phase’ when people are still working and actively contributing to the balance - so, before they retire. But the threshold still isn’t the biggest problem people have with the legislation…

There’s more?
Yep… The aspect of the new bill that’s causing the most concern by far is that the amount the tax will be calculated at includes something called unrealised gains for property, businesses and shares held in self-managed super funds.

What’s an unrealised gain?
Many people have assets besides just cash included in the make up of their superannuation accounts. Some people might have properties, shares or a business in there too. And if the value of those assets pushes a super account over that $3 million mark, it’s in line to be charged the new tax.

Go on…
What’s causing a major ruckus is that the value of those assets, so the properties, farms, businesses and shares, will be assessed for tax purposes based on what they’d be worth if sold in the current market - this is called an unrealised gain. So, for example, the value of a property will be taken from a valuation on paper rather than an actual sale. 

What’s the new tax worth to the government?
Treasurer Jim Chalmers projects that it’ll raise $2.3 billion in its first year, and $40 billion over a decade. 

Has the bill just been announced?
Nope…  The bill - its official name is Division 296 - was first announced back in 2023. It passed in the Lower House last year, but the government couldn’t get the support it needed to get it through the Senate, so it was put on ice until after the election.

Which Labor decisively won; so where does that leave things?
Full steam ahead for the super tax bill, particularly since the Greens said they’ll support it, with a few tweaks.

Hang on, if it hasn’t passed the Senate, how can it start on 1 July?
The government is forging ahead with the original start date even though parliament doesn’t sit until 22 July - that’s how confident they are that it’ll pass. Chalmers says that the time gap isn’t a problem, and that "it’s not unusual for tax changes to be legislated after a start date". 

How many people will it affect?
As it stands, the government says it’ll impact the wealthiest 0.5% of Australians - that’s the superannuation accounts of around 80,000 people. But economists say that while it might seem like a tax targeting rich people, it stands to impact a lot more of us over time as the value of money changes. For example, $3 million today is a different proposition to $3 million 30 years ago.

Is there any pushback from the Coalition?
Plenty - and we’re likely to see more over the coming weeks… The Coalition says Division 296 is “an entirely novel concept that has no basis in basic tax principles” and the fact it’s not indexed to inflation “will capture hundreds of thousands of Australians, particularly young Australians, into the future”. Indexation is also something the Greens want to see too, in order to pass the legislation… 

Back it up a bit… what do you mean by indexation?
It means they want to see the cap rise in line with the inflation rate, making it fairer because the higher the threshold, the harder it is for average working Aussies to reach (and be hit with the extra tax). 

Got it. Do the Greens want anything else?
Yep… They also want the cap to be lowered to $2 million so it applies to more people initially. But as the bill currently stands, economists are concerned that millions of Aussies would exceed the threshold as their balances grow. So even people who are young now, and those on smaller incomes, could eventually enter the millionaire’s super club in a few decades…

What has the public reaction been like?
There’s been no shortage of reporting about this… and in those reports, farmers, property investors and small business owners have been quoted saying they’ll be forced to sell because they won’t be able to afford to pay the tax on the unrealised value of their assets… 

Are there payment options?
Yes… For people who might not have the liquid cash to pay it, the Tax Office says it can be paid using money from their super accounts. But that presents its own problems for many people who don’t want to eat into their nest-egg for tax, and others whose super accounts are made up of what are called illiquid assets - namely properties and businesses. 

What about the impact on the super industry?
Economists say people are already reconsidering their retirement savings strategies and many have begun shifting their assets away from super funds and into family trusts. This is particularly the case for people holding property for kids or grandkids in super who are concerned about eroding their balance due to withdrawals to cover the tax. And another example is that there have been reports of some people purposefully reducing their super balances by taking money out to help their (adult) children with a home deposit. 

So we’re seeing the bank of mum and dad digging into their super now to avoid tax later?
Exactly… And many others are completely rethinking their savings strategies for retirement - keeping their super balances at a level that’s out of reach of the new tax.

Baby, that's a cracking idea...

Welcome to Purebaby Pre-Loved - a marketplace where you can buy and sell gently used Purebaby clothes with ease. It's where you can score great deals on quality pieces or make some money back on outgrown items. Parents have plenty to get on with, and this takes the hard work out of considered shopping that's kind to both your wallet and the planet. Head to their online store and shop up a sustainable storm.

Onto our Recommendations

Number crunching: This ATO fact sheet on Division 296 has the formula for how the Taxation Office will calculate it plus examples of various financial scenarios if you’re keen to dive in.

Recent Shortcuts