Proposed Superannuation Cap – How Much Superannuation is Enough?
It’s a common question and one normally reserved when considering how much to save for a comfortable retirement. The Federal Government has provided us with their answer.
The Government is proposing a limit of $3,000,000 per member, above which the tax rate on earnings will rise to 30%. This limit will not be indexed.
There are a few important things to remember:
- This does not impact the ability to contribute to super – which is already governed by other mechanisms.
- This does not limit the ability to commence a pension. We expect the Transfer Balance Cap to index to $1,900,000 in July, and the earnings on pension accounts remain tax-free.
- There is no requirement to withdraw amounts in excess of this from a super fund, it simply changes the effective tax rate on future earnings on monies in excess of $3,000,000.
- This aligns the tax on large super balances with corporate entities.
The devil is going to be in the detail, and it appears that there is still some detail to be ironed out through the planned consultation process.
- An additional 15% tax will be levied on ‘earnings’ in the same proportion that a member’s balance exceeds $3,000,000.
- ‘Earnings’ will be calculated as the difference between a member’s Total Super Balance calculated at each 30 June, adjusted for contributions and withdrawals. This measure, by definition, includes unrealised capital gains.
- The measure will not apply to existing unrealised gains.
- Negative earnings will be able to be carried forward to future years.
- Without indexation, at some point, the Transfer Balance Cap will exceed this limit and pension earnings will likely become taxable.
- The Government has signalled commensurate treatment for defined benefit interests and pensions.
The substantial changes made to the superannuation system in 2017, including the introduction of lower Contribution Caps (limiting the level of annual contributions), a Total Super Balance (limiting further the rate of contributions) and a Transfer Balance Cap (limiting the amount that be invested into a tax-free pension account) largely limit the ability of future generations to disproportionately benefit from the tax concessions provided to super funds. As such, this is really legislation that is squarely aimed at ‘super earners’ (tech billionaires?) and the existing generation of investors who have accumulated large amounts within super funds.
The legislation is not proposed to be effective before 1 July 2025. Our advice to impacted clients is not to act with undue haste. There is a lot of detail to be worked through and the decision to retain or remove money from super will depend on an individual’s preservation status, family structure, health and other income. We need to see the final form of the legislation and understand exactly what will be implemented. There remains an ample window to review investors’ positions and develop a strategy.
Of course, we are happy to discuss the impact with affected or interested barristers.