Super fund earnings for balances over $3m to be taxed at 30% from 1 July 2025

The government has recently announced its intention to reduce tax concessions for individuals with a Total Superannuation Balance (TSB) surpassing $3 million, starting from 1st July 2025. This reduction will involve the application of an additional 15% tax on calculated earnings that exceed the $3 million threshold.

As a result, these excess earnings will generally be subject to an overall tax rate of 30%. However, earnings related to Total Superannuation Balances (TSBs) below $3 million will continue to be taxed at the fund's standard rate of 15%, or at 0% if they pertain to super balances in the pension retirement phase. Read on to learn more about how the new tax will work. The proposal is to tax the difference between a member's TSB for the current and previous financial year; adjusted for net contributions (excluding contributions tax paid by the fund on behalf of the member) and withdrawals.

Why are the superannuation tax concessions changing?

The 2022-23 Tax Expenditures and Insights Statement shows that revenue foregone from superannuation tax concessions amounts to about $50 billion a year, and is projected to exceed the cost of the Age Pension by 2050. The proposed restriction to the tax concession is expected to generate revenue of about $2 billion in its first full year of revenue.

Which earnings will be subject to the 30% rate?

The 30% rate will only apply to the earnings that correspond to the portion of superannuation account balances exceeding $3 million. Earnings attributed to the balance up to $3 million will remain subject to the concessional tax rate of 15%. The changes will come into effect after the next election and will not be retrospective but will rather apply to future earnings.

The concessional tax treatment of super fund earnings under the current rules

Currently, complying superannuation funds, including SMSFs, generally receive concessional tax treatment on their taxable income, as outlined below:

• If a fund's taxable income is derived from superannuation fund assets used to support accumulation entitlements, it is taxed at the concessional tax rate of 15%.
• Any ordinary or statutory income of a superannuation fund that originates from fund assets supporting retirement phase pensions is tax-free for the fund.

Existing superannuation caps, limits and restrictions

While there is no specific limit on the total amount an individual can hold within the superannuation system, there are certain caps, limitations, or restrictions that apply, including the following:

Contribution caps

Contribution caps limit the amount that an individual can contribute to their superannuation balances while still being eligible for concessional tax treatment. For instance, during the 2023 income year, there is a concessional contributions cap of $27,500 and an annual non-concessional contributions cap of $110,000 per individual.

TSB restriction for non-concessional contributions

An individual can only qualify for the annual non-concessional contributions cap for a particular income year if their TSB on the preceding 30th of June was below the general transfer balance cap. For instance, an individual's annual non-concessional contributions cap for the 2023 income year would be $110,000 if their TSB on 30th June 2022 was less than $1.7 million.

The transfer balance cap for retirement phase pensions

The transfer balance cap sets a maximum threshold on the total amount an individual can transfer into the tax-free retirement phase during their lifetime, achieved through the initiation of one or multiple pensions in the 'retirement phase.'

The current general transfer balance cap is set at $1.7 million, but it is anticipated to rise to $1.9 million starting from 1st July 2023, due to recent increases in the Consumer Price Index (CPI). Consequently, an individual who initiates a retirement phase pension for the first time on or after 1st July 2023 will have a personal transfer balance cap of $1.9 million.

Tax Warning – Consequences of breaching the transfer balance cap

Where an individual exceeds their transfer balance cap at a given time, they will become liable to pay excess transfer balance tax. This will occur where, for example, an individual with a personal transfer balance cap of $1.7 million commenced their first retirement phase pension in April 2023 using $2 million of their accumulation balance in an SMSF.

In this case, the individual has an excess transfer balance amount of $300,000 (i.e., $2 million – $1.7 million transfer balance cap). Excess transfer balance tax is imposed (generally at the rate of 15%) on a notional earnings amount calculated in respect of an individual’s excess transfer balance amount. An individual in this case is also required to commute (or transfer) the excess transfer balance amount back to accumulation phase and may even be required to withdraw the excess amount completely from the superannuation system.

Which individuals will be subject to the 15% additional tax from 1 July 2025?

The new tax will only apply to individuals with more than $3 million in superannuation balances at the end of the financial year. Under the government’s proposal, an individual will become liable to pay the 15% additional tax in respect of an income year (commencing from 1 July 2025) where their total super balance (or TSB) exceeds $3 million at the end of that income year (i.e., on 30 June of the income year).

For example, if an individual’s TSB on 30 June 2026 exceeds $3 million, they will be subject to the 15% additional tax on calculated earnings above $3 million (refer below) for the 2026 income year. This means that individuals can identify whether they will be subject to the 15% additional tax by reference to their TSB at the end of each income year, starting from 30 June 2026.

How will an individual’s TSB be calculated under the government’s proposal?

Earnings will be determined based on the difference between an individual's total superannuation balance (TSB) at the beginning and end of the financial year, while accounting for any withdrawals and contributions made during that period.

Please take note that an individual's TSB encompasses all their superannuation interests and is not treated as a separate figure for each interest. In other words, the $3 million threshold is applied per individual, rather than per account or fund.

To minimise the impact on the majority of members unaffected by this measure and avoid significant and costly system and reporting changes, the government's proposed approach relies on existing fund reporting requirements. Since funds generally do not report or calculate taxable earnings at the individual member level, the proposed measure adopts an alternative method for identifying taxable earnings for those affected.

Here is the calculation method, as provided in the fact sheet:

An individual’s TSB is a concept and a calculation that applies under the existing law, primarily to determine whether an individual is entitled to certain superannuation-related concessions. For example, an individual’s TSB is currently relevant for the purposes of determining whether the individual can access the following concessions:

The ‘catch-up’ concession

The 'catch up 'concession for unused concessional contribution cap amounts from any one or more of the previous five income years (starting from the 2019 income year). To apply the catch-up concession for an income year (e.g., 2023 income year), an individual must have a TSB of less than $500,000 on 30 June of the immediately preceding income year (e.g., 30 June 2022).

A non-concessional contributions cap (including a non-concessional contributions cap under the ‘bring-forward rule’)

As noted above, to be eligible for a non-concessional contributions cap for an income year (e.g., 2023 income year), an individual must have a TSB of less than the general transfer balance cap on 30 June of the preceding income year (e.g., 30 June 2022).

Applying the $3 million total super balance threshold

Under the government’s proposal, the $3 million TSB threshold is intended to be applied in the following way:

The $3 million TSB threshold will not be indexed

According to the Treasury consultation paper, this is similar to other superannuation-related thresholds, such as the $250,000 threshold for being subject to the 15% Division 293 tax for concessional contributions.

The $3 million TSB threshold will apply on a ‘per individual’ basis

This means that the threshold is not shared between spouses and family members or between individuals with interests in the same SMSF.

The $3 million TSB threshold and the transfer balance cap

The $3 million TSB threshold will be applied separately to the transfer balance cap (i.e., $1.9 million from 1 July 2023). This means that where an individual has commenced one or more retirement phase pensions, the individual will need to monitor whether:

• their TSB (which includes the value of any pension(s)) exceeds $3 million on 30 June of each income year (commencing from the 2026 income year);
• they exceed their personal transfer balance cap at a given point in time. Note that when an individual commences a retirement phase pension, it is the value of the pension upon its commencement that is counted towards the individual’s transfer balance cap. Any subsequent increases in the value of the pension after commencement are ignored and not counted towards the individual’s transfer balance cap.

Example – Applying the $3 million TSB threshold

Paul and Jennifer have the following superannuation interests as at 30 June 2026:

• Paul has an accumulation interest in an SMSF valued at $1.8 million (and no other interests).
• Jennifer has the following accumulation and pension interests:
• A retirement phase pension interest in the SMSF valued at $1 million.
• An accumulation interest in the SMSF valued at $1.8 million.
• A retirement phase pension interest in an APRA-regulated fund valued at $700,000.

Will Paul be subject to the 15% additional tax for the 2026 income year?

No. As Paul's TSB on 30 June 2026 does not exceed $3 million, he will not be subject to the proposed 15% additional tax.

Will Jennifer be subject to the 15% additional tax for the 2026 income year?

Prima facie, yes. As Jennifer's TSB on 30 June 2026 is $3.5 million (i.e., $1 million + $1.8 million + $700,000), Jennifer will be subject to the 15% additional tax liability.

What if a loss is calculated for a financial year?

Negative earnings can be carried forward and used to reduce the tax liability in the subsequent years.

Paying the tax

Individuals will be provided with the option to pay the tax either personally or from their superannuation funds. In cases where individuals possess multiple funds, they will have the opportunity to select the specific fund from which the tax will be paid. It is essential to note that the tax liability will be distinct from the individual's personal income tax obligations.

Will defined benefit accounts be affected?

The Government aims to establish fair and equitable treatment for defined benefit interests. Treasury will engage in consultations to determine the appropriate approach for dealing with defined benefit interests.

Will the retirement phase balance be affected?

Although the media announcement emphasised accumulation phase earnings, the subsequently issued detailed fact sheet clarifies that earnings subject to the additional tax will be determined by comparing an individual's closing and opening TSBs. An individual's TSB at a specific point in time encompasses both the retirement phase value and the accumulation phase value of their superannuation interests. As a result, the taxable earnings will consider the unrealised gain or loss in the retirement phase balance, in addition to the accumulation phase value.