There’s been a lot of noise around superannuation lately, and it’s no surprise.
Since the Federal Government announced proposed changes to tax rules for super balances over $3 million (Division 296 tax), media commentary has exploded and sparked debate, and alarm bells are ringing for those with higher balances.
The government says the tax applies to less than 0.5% of Australians. But even if you’re not directly affected now, there’s growing unease about how the rules are framed and what they could mean for the future of retirement savings in Australia.
So, let’s break it down: what’s changing, why it’s controversial, and what it could mean for you or your family.
Q: What are the proposed changes to superannuation tax?
A: Starting 1 July 2025 (if passed), the government plans to apply an additional 15% tax rate on earnings related to superannuation balances above $3 million. This would bring the total tax rate on earnings over that threshold to 30% when combined with the existing 15% rate.
Like Division 293 tax, it’s assessed to the individual, not the fund, although you will be able to request the fund pay it.
On the surface, that may seem straightforward. However, three core features of the proposed policy are generating debate:
1. Tax on unrealised gains
The additional tax would be applied to the increase in the value of a member’s total superannuation balance—even if you haven’t sold any assets to realise those gains. This is different from typical capital gains tax (CGT), which only applies when a gain is realised (i.e. an asset is sold).
2. No refunds for losses
If those assets subsequently fall in value, you won’t get a refund of the tax paid. Rather, that loss will be applied to offset future gains. This means if your super balance fluctuates, you could still end up paying tax on gains that never actually eventuate.
3. No indexation of the $3 million threshold
The cap is fixed. It won’t rise with inflation, wage growth or average super balances. Because of this, more Australians may eventually be caught in the net, even if they’re not today. While we may expect future governments to increase the threshold in the future, this uncertainty is causing some concern.
Related: Protect your SMSF pension tax benefits before 30 June
Q: How will the new Division 296 tax be calculated?
Here’s how the new tax works under the current proposal:
- If your total super balance (TSB) exceeds $3 million at the end of the financial year, any growth in your balance—after factoring in contributions and withdrawals—will be treated as ‘taxable super earnings.
- Only the portion of the earnings that relates to the amount over $3 million is taxed at 15%
Here’s a quick example:
Say your superannuation earnings balance increases from $3.2 million to $3.45 million over a financial year, here are the numbers crunched:
- Total earnings = $250,000
- Amount over $3 million = $450,000
- Total balance = $3.45 million
- To calculate the tax:
- (450,000 / 3,450,000) × $250,000 × 15% = $4,891
Even though this is a relatively modest gain, the tax adds up. And in years where asset prices surge (think property or equities), the impact will be much greater, even if the growth is only on paper.
Q: Why is the new super tax proposal facing backlash?
A: The idea of taxing unrealised capital gains is mostly unheard of in Australian tax law.
Critics argue it creates several risks:
- Cashflow issues – You could face a tax bill without having sold any assets to generate cash to pay it. Taxing unrealised gains can be especially problematic to your financial situation if you’re an SMSF member with large holdings that are hard to sell or turn into cash quickly (illiquid assets), such as property or private business interests.
- Precedent setting – Many fear this approach could spill into other areas, eventually extending to trusts, investment portfolios or even personal assets. This would make it harder to plan finances and manage cash flow and could also make investing more complicated and less attractive overall.
- Estate planning impacts – If you’re using super as an intergenerational wealth vehicle (a way to pass money to your children or grandchildren), this could significantly alter your planning strategies. Asset-rich, income-light retirees could be especially affected.
Related: Estate planning: Q&As for small business owners
Q: What has the market response to the Division 296 tax been?
A: There’s been a noticeable rise in people asking about withdrawing or restructuring their super fund, even though the legislation is not yet law.
Some are considering:
- Withdrawing funds to bring their balance below the threshold
- Moving assets out of super into family trusts or other vehicles
- Reducing contributions or redirecting investments
However, these strategies could have unintended tax consequences. Outside of super, capital gains may be taxed at your marginal rate, and income is generally taxed less favourably.
And the irony is this may be what the government wants. Super is designed to fund retirement, not to serve as a tax-minimised estate planning tool. The new policy, according to the Treasury, is about ‘making super more sustainable and equitable.’
Q: What actions should I be taking considering the proposed Division 296 tax?
A: If you have a super balance above $3 million, you don’t need to act immediately.
The proposed legislation changes haven’t passed Parliament, and it’s still unclear whether they’ll take effect by 1 July 2025. Even under the current proposal, you have until 30 June 2026 to make any withdrawals for the purpose of reducing your balance.
For most Aussies, superannuation remains the most tax-effective way to save for retirement. Even with this extra tax, the concessional environment still beats most alternative structures.
That said, if your balance is close to or above the threshold, now’s the time to:
- Talk to your advisor
- Review your long-term retirement goals
- Assess the tax implications of any change
- Think about estate planning in light of the proposed rules
Don’t rush to act—and stay informed
There’s a lot of heat around these proposals. But rather than rushing to restructure your financial position, we recommend you stay calm, wait for the law to pass then plan ahead, taking a measured, informed approach.
We’re keeping a close eye on how the Labour Government legislation unfolds and are here to help you understand what it really means for your own personal objectives and situation—now and if they pass legislation on the proposed start date.
Reach out to your Maxim advisor or contact our team today.
