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Following the Government’s release of the 2022-23 Tax Expenditures and Insights Statement, a media release issued by ministers Jim Chalmers and Stephen Jones on Tuesday heralded the pending arrival of the highly anticipated cap on high superannuation balances.
While there are only limited details from which we can work off at this early stage, initial fears of a ‘hard cap’ targeting certain SMSFs with high balances appear to have been alleviated. These initial concerns primarily revolved around the potential for a ‘hard cap’ to force the removal of superannuation balances above a certain limit – as this risked a raft of seemingly unnecessary complexity and disruption.
Fortunately, it appears that the main issue the Government seemed to be grappling with was not necessarily the presence of large balances in the super system, but rather the tax concessions that these balances attracted.
To that end, the approach announced by Government seems to more appropriately deal with this issue – without forcing the removal of superannuation benefits or restricting the amount that an individual is permitted to save through the superannuation system.
This proposed ‘soft cap’, is instead designed to specifically target the level of tax concessions enjoyed on earnings derived by fund members with a superannuation balance over $3 million.
That is, it’s a measure that is broadly designed to double the current rate of tax paid by superannuation funds on the earnings derived by fund assets above this level – from 1 July 2025.
What we know so far
While there is some way to go before this measure is finalised and becomes law, following the release of a Treasury Fact Sheet titled “Better Targeted Superannuation Concessions” some of the details behind Tuesday’s initial announcement are starting to become a little clearer.
For example, currently, fund earnings derived by assets held in the accumulation phase are generally subject to tax at a maximum tax rate of 15%1 within a superannuation fund – regardless of the member’s fund balance. It appears that this will continue to be the case beyond 1 July 2025.
However, the Government’s announcement will broadly see ‘earnings’ derived by a member’s superannuation assets above $3 Million, subject to a new and additional 15% tax from 1 July 2025.
Importantly, it is not the member’s actual earnings that will be subject to this additional tax, rather the proposal introduces a new methodology to calculate the relevant earnings amount and the resulting tax liability for affected individuals.
How will the earnings, and resulting tax liability be calculated?
The Treasury Fact Sheet outlines a proposed 3-step methodology that will be used to determine the amount of an affected individual’s tax liability:
Step 1 – Determine the relevant ‘earnings’ amount
The Treasury Fact Sheet states that:
“Earnings are calculated with reference to the difference in TSB at the start and end of the financial year, adjusting for withdrawals and contributions.”
To achieve this, it has been proposed that the following formula be used:
Earnings = Current financial year’s TSB – Previous Financial Year’s TSB + Withdrawals – Net Contributions*
*Net contributions exclude contributions tax paid by the fund on behalf of the member.
Observations: As this formula, for determining the relevant level of earnings, references a member’s Total Superannuation Balance (TSB), this means both accumulation and pension phase assets will be counted toward this $3 Million cap.
Also worth noting is that this proposed formula will capture notional (unrealised) capital gains and losses.
Notes: The Government’s Fact Sheet indicates that if, as a result of applying this formula, an individual makes an earnings loss in a financial year, the individual will be able to carry this earnings loss forward to reduce this tax liability in future years.
Step 2 – Determine the proportion of earnings that correspond to a member’s TSB above $3 Million
The result from Step 1 will broadly represent the total earnings for each affected member’s superannuation interests across all their superannuation providers.
This next step (Step 2) is important to ensure that only the proportion of these earnings that relate to the member’s superannuation benefits above $3 Million will be taxed.
This will be calculated as follows:
Proportion of Earnings = Current Financial Year’s TSB – $3 Million / Current Financial Year’s TSB
Step 3 – Calculate the tax liability
Tax Liability = 15% x Earnings (from Step 1) x Proportion of Earnings (from Step 2)
Example2
Louise is 40 and working. At 30 June 2026, she has a balance of $2 million in an APRA-regulated fund, and a balance of $3 million in an SMSF. At 30 June 2025, the balance of her APRA-regulated fund was $1.9 million and the balance of her SMSF was $2.9 million. She does not meet a condition of release, so she has no withdrawals during the year. She makes $20,000 of concessional contributions into her SMSF. Her contributions net of tax on contributions is $17,000.
This means Louise’s calculated earnings are:
$5 million – $4.8 million – $17,000 = $183,000
Her proportion of earnings corresponding to funds above $3 million is:
($5 million – $3 million) ÷ $5 million = 40%
This means her tax liability for 2025-26 is:
15% × $183,000 × 40% = $10,980
Louise elects to pay $5,000 from her APRA-regulated fund and $5,980 from her SMSF.
How will the tax be levied?
Treasury has indicated that affected individuals will be given a choice of either paying this tax out-of-pocket or having it deducted from their superannuation fund(s).
Further, individuals who hold multiple superannuation funds will be able to select the fund from which the tax is deducted.
Observation: Based on the above example from Treasury’s Fact Sheet (i.e. Louise), it appears that affected individuals will be able to choose to have the tax levied from multiple funds should they choose to do so.
What about pension assets?
It is anticipated that the tax on earnings derived by assets supporting retirement phase pensions will not be impacted by this change.
That is, we would expect that these earnings will continue to be treated as Exempt Current Pension Income (ECPI) – noting of course that the amount a member can place into retirement phase pensions is already limited by the Transfer Balance Cap (TBC).
How will this measure be implemented?
Individuals with a TSB over $3 million at the end of a financial year will be subject to this additional 15% tax on the relevant earnings (as discussed above) derived during that year.
As previously noted, this measure is proposed to commence from 1 July 2025, with application from the 2025-26 financial year onwards.
Because an individual’s TSB is measured at 30 June each financial year, this measure will first impact those individual’s whose TSB is over $3 Million at 30 June 2026.
As a result, the first tax liability notices are expected to be issued by the ATO in the 2026-27 financial year – i.e. these notices will relate to the additional tax liability incurred on earnings derived during the 2025-26 financial year.
From a fund reporting perspective, the proposed approach appears to be based on existing fund reporting requirements. And, as the ATO already uses this superannuation fund reporting to calculate the total amount that individuals have in the superannuation system across multiple accounts, the Government claims this will minimise the extent of any new reporting requirements.
Note: Individuals are currently able to view their TSB and various other superannuation related information via the ATO’s online services.
Uncertainty remains
There are several areas which will no doubt be clarified as more details come to light, and others that may yet evolve as the consultation process runs its course.
For example, it is still unclear how the $3 Million threshold was arrived at.
As this is a cap on a member’s total superannuation holdings, including both pension and accumulation interests, the rationale for establishing this amount as a measure of high superannuation balances will likely face some scrutiny.
In addition, as things currently stand, the Government has stated that it does not intend for this threshold to be subject to indexation. In the absence of indexation, the relevance of this threshold as a cap on high superannuation balances will be further brought into question over time.
Also, in addition to various aspects of implementation which will hopefully be addressed through the consultation process, while the formula for calculating an individual’s ‘earnings’ provides an adjustment for withdrawals made throughout the year, it remains unclear as to where pension payments received by a member fit into this process.
Where to from here?
In terms of the introduction of this measure, the Government has indicated that legislation will be introduced as soon as practicable, following a period of consultation on implementation matters.
Early indications from the Treasurer are that the Government intends to finalise the details of this measure before the Federal Budget in May.
However, it is difficult to meaningfully predict the timeframes as this measure is not proposed to commence before 1 July 2025 – which happens to be after the next federal election.
Interestingly, if this measure is introduced and passed into legislation during this current term of parliament, any subsequent removal of this measure would require a future Government to introduce, and successfully pass, separate legislation for its removal.
While the proposed soft cap is a positive move away from the initial fears of a hard cap, we remain of the view that it is still an additional and unnecessary cap that will only further complicate an already complex superannuation system.
1The effective tax rate in a superannuation fund is typically lower than 15% when franking credits and/or CGT concessions are applied.
2This example is taken from the Treasury Fact Sheet titled: Better Targeted Superannuation Concessions, released 1 March 2023.
Written by Fabian Bussoletti, Technical Manager