By Dean Ireland

Ever since the Federal Government announced that there would be a new tax on super, the big question has been, who is this going to affect?

The proposed legislation (DIV296) is expected to have an initial impact on just 80,000 super members. It’s been positioned as a tax on the rich. And this ‘robin hood’ message has passed the pub test for most people.

But, as with most legislation, the devil is the detail. In this article we’re taking a closer look at the proposed legislation to see if it really is just a tax for the rich, or if it’s something more of us might need to talk to our advisers about.

How the tax is calculated

The first thing we need to understand is how the new tax would work.

It’s not a tax that is calculated across the total super balance (TSB).

It’s not a tax on the super balance above the $3 million threshold.

It is a 15% tax on the earnings generated by that proportion of your super that sits above the $3million threshold.

How good is your math?

In general, it’s the maths questions that freak quiz show contestants out the most. It’s not everyone’s favourite school subject, so to make the numbers a bit easier to follow, we’ve put together a simple example.

In this scenario, the total super balance is $4 million at the start of the financial year.

At the end of the financial year the balance has grown to $4.5 million.

That’s an increase of $500,000.

Now, if there are no contributions made to super during this period, and there are no withdrawals, all of that figure of $500,000 can be attributed to earnings.

If we look at the orange section in the bar chart, we can see that $1.5 million sits above the $3 million tax threshold. $1.5 million is 33% of the TSB. So that means that 33% of the annual earnings generated by the super fund will be taxed at 15%.

So, our calculation is:

$500,000 in total super earnings

X

33% (the proportion of super above the threshold)

X

15% (the tax rate)

This gives us a figure of $24,750.

Paying the tax bill

When we think about tax on super, we’re used to the idea that we pay a small amount of tax on employer contributions and earnings while we accumulate. But the idea that we might pay an additional tax on a proportion of the earnings our super generates, is totally new.

In the scenario above, $24,750 needs to be paid to the ATO. Next year there will be a new set of calculations and there will probably be another tax bill.

How will this tax be paid?

Well, you’ll have two options. You can pay from your personal savings. Or you can have that money withdrawn from your super.

Which option is best for you will depend on how much cash you’re holding in the bank, and how liquid the assets are inside your super.

What has this got to do with me?

If you’re thinking this new tax is just going to be a problem for the uber rich, you’re probably right. However, it’s always good to be aware of what might be down the road as your super balance grows.

At this stage the Government isn’t looking at indexing the threshold to grow with inflation over time. This means that eventually the new tax is likely to impact more than the initial 80,000 the ATO is targeting.

There are specific circumstances that could push you over the threshold. Here are two examples.

Downsizing your home

In this scenario an individual decides to sell his house and buy a small apartment. Under the downsizer rules, he is able to contribute up to $300,000 from the house sale into his super tax free.

That $300,000 contribution actually pushes his TSB over the $3 million threshold by $200,000 where earnings attract the additional tax.

As result, he could end up paying $3,750 to the ATO.

Inheriting a balance

Another situation that could push your super balance over the threshold is when two super balances emerge. This could be something that happens automatically when your partner passes.

Super is still a great structure

Even when the new legislation comes into force, the effect will be minimal for most people. Superannuation is still a great structure that enables people to incur only a very small amount of tax as they grow their savings for retirement.

If you do have a substantial super balance, it’s important to think things over before you take action. There’s no need to withdraw money from super. That could potentially just expose those funds to other, more costly, tax impositions.

The DIV296 legislation isn’t due to be enacted until 2025. You have time.

Talk to a qualified financial adviser and get a more complete picture of how to manage your super for the future.

Reference: Better targeted superannuation concessions – exposure draft explanatory materials (treasury.gov.au) 

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