Understanding the new $3 million super tax

Fine-tuning seems to be synonymous with our super system. That's certainly been the case with the proposed new $3 million super tax. 

It's been two years since the Albanese government raised the idea of an additional tax on the earnings of multi-million-dollar super balances.  

After extensive consultation - and the inevitable tweaking - Treasurer Jim Chalmers recently confirmed exactly what the new tax will look like.  

And it's been through quite a bit of remodelling. Here's how the latest version shapes up.  

30% tax on earnings over $3m; 40% on earnings over $10m 

From 1 July 2026, the investment earnings that relate to super balances over $3 million will be taxed at 30%, up from 15% at present. 

Earnings relating to the portion of super below $3 million will still be taxed at the current concessional rate of 15% (or nil for balances associated with pension accounts).

The latest version of the new tax sees a second tier added. This will see returns on super balances over $10 million taxed at a total of 40%.  

Only realised gains will be taxed 

In a sensible move, only realised gains will be taxed.  

This was a serious point of contention with the original version of the tax, which proposed taxing unrealised gains. Not only would this have gone against the grain of how our tax system works, it would also have presented practical issues.  

Investments such as shares can be highly volatile. Unlisted assets can be challenging to value. And funds with significant holdings in property could have faced a cash flow crunch when it came to paying the extra tax on unrealised gains.   

Taxable thresholds will be indexed 

Under the latest version of the new tax, both thresholds - $3 million and $10 million - will be indexed.  

This avoids the earlier issue where increasing numbers of Australians could have been caught up by the tax over time.  

As it stands, the current average super balance sits at $172,834, which by the way is a record high, according to research by the super sector's peak body, ASFA. It's a long way from $3 million. Nonetheless, with the addition of indexing, the overwhelming majority of people will never be impacted by the new tax. 

Today, only around 0.5% of super balances top the $3 million mark. Even fewer - just 0.1% (about 8,000 people) - have super in excess of $10 million. 

The verdict 

No one enjoys paying tax. Even so, the new and improved 'Better Targeted Superannuation Tax Concessions' reforms bring an element of fairness to our super system.  

The tax breaks that apply to super have always been designed to help Australians enjoy a more comfortable retirement. In 2019-2020, though, around 30% of the value of super's tax concessions went to the highest 10% of earners.

As the Grattan Institute notes, for some Australians, super has become a taxpayer-subsidised inheritance scheme.  

I imagine, for instance, the average worker would find it galling to learn there are around 100 individuals with super balances exceeding $50 million who are paying just 15% tax on their fund's earnings. 

On this basis, it's hard to see the revised Division 296 tax changes (named for the section of tax legislation it relates to) getting the thumbs down from most people. 

Changes at the bottom will also make the system fairer   

At the other end of the spectrum, low-paid workers are set to benefit from changes to the Low Income Super Tax Offset (LISTO).  

At present, many of the lowest-earning Australians pay a higher rate of tax on their super than they do on take-home pay.  

This is set to change from 1 July 2027, when the LISTO eligibility cap will increase from $37,000 to $45,000. 

This simple change is expected to add around $15,000 (in today's dollars) to the super savings of 1.3 million low-earning Australians at retirement, 60% of whom are women.  

Super - still a great way to save for retirement  

Yes, changes to super can be frustrating. However, despite the seemingly constant fiddling with the rules, I continue to be a big fan of superannuation. 

Even with the proposed new tax, super remains a very tax-friendly way for the vast majority of Australians to save for their senior years. 

And, as we live longer lives, and in better health, it is super that will provide the income for many of us to enjoy a decent lifestyle once we exit the workforce. 

That said, the proposed Division 296 tax is a reminder of the need to grow investments outside of super. 

It's easy to overlook regulatory risk, but as we are seeing right now, it has the potential to impact personal wealth. Spreading your money across multiple asset classes, in and out of super, is a great way to diversify and reduce risk.