New ‘30% tax rate’ for super balances over $3 million – a tax on notional gains at a progressive rate

By Adam Dimac and Andrew O’Bryan

Unless you have been hiding under a rock, you would be aware that the Federal Government has announced a new ‘30% tax rate’ for super balances over $3 million.

The proposal seems to be a reflection of continuous wind-backs to the superannuation system that followed the removal of the ‘reasonable benefits limit’ that was announced by Costello in 2004, and subsequently legislated to take effect from 1 July 2007.

Overview

The proposal has been described in the Government’s Fact Sheet as a reduction to ‘the tax concessions available to individuals whose total superannuation balances exceed $3 million at the end of the financial year.‘

However, in effect, it will operate to impose a new tax on individual members somewhat equivalent to the existing ‘Division 293 Tax’.

The result is a regime which would impose tax on notional increases to superannuation account balances, including unrealised and, in some scenarios, unfunded gains. Although it has been understood by some as a ‘flat’ rate of tax, the actual rate of tax will be progressive and based on the amount that a member’s superannuation balance exceeds the $3 million cap, up to a maximum rate of 15%. Importantly, the member is only subject to additional tax on the earnings that are attributable to the total superannuation balance (TSB) that is in excess of the $3 million TSB threshold.

Where the new tax applies, members will have the choice of either paying the tax out-of-pocket or from their superannuation funds. This implies that the regime will include a clear condition of release to meet the tax liability.

The proposal is intended to apply from 1 July 2025. It will 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.

The tax proposed under the regime (up to a cap of 15%) is in addition to any tax a superannuation fund pays on earnings in accumulation, which is generally at a rate of 15% – hence the concept of a new ‘30%’ tax rate.

The formula for working out the amount of additional tax payable is set out in the Fact Sheet, and a basic example from the Fact Sheet is set out below (with further examples set out in the Fact Sheet).

Balance exceeding $3 million

– Warren is 52 with $4 million in superannuation at 30 June 2025. He makes no contributions or withdrawals. By 30 June 2026 his balance has grown to $4.5 million.

– This means Warren’s calculated earnings are:

$4.5 million – $4 million = $500,000

– His proportion of earnings corresponding to funds above $3 million is:

($4.5 million – $3 million) ÷ $4.5 million = 33%

– Therefore, his tax liability for 2025-26 is:

15% × $500,000 × 33% = $24,750

If there is a loss in any particular financial year, this can be carried forward to reduce the tax liability in future years. It appears from the example in the Fact Sheet that the loss will be applicable only against future earnings as calculated under the regime, and not against other income.

It is currently unclear whether the $3 million cap will be indexed. If not, changes to the cap will require formal legislative amendment.

There are other aspects of the proposal that require clarification, which we expect will be provided if the proposal is enacted.

What to consider now

As the proposal is intended to take effect from 1 July 2025, members should consider what options are available to them now, including:

• liquidity, and the ability to meet tax liabilities under the proposed new regime either from personal funds or from liquid funds in superannuation. For some individuals, particularly with illiquid investments in private entities, this may be difficult.
• options available to reduce TSB below $3 million. This decision should take into account estate planning requirements, conditions for release, the ability to split and reallocate balances between spouses, tax on death benefits, preferred alternative investment vehicles and a careful consideration of the impact of moving assets and funds outside of the superannuation system (and whether the alternative is appropriate for both commercial and taxation purposes).