The truth about the new $3m super tax rules

Australians with multimillion-dollar super balances will face higher taxes under the federal government's revised super tax proposal, while low-income earners will also receive a boost to their retirement savings.

Treasurer Jim Chalmers confirmed today that from July 1 next year, earnings on super balances above $3 million will be taxed at 30%, up from 15%.

A new tier will apply to accounts over $10 million, taxed at 40%. About 90,000 Australians will be affected, including 9000 in the top tier.

Both thresholds will be indexed to prevent bracket creep, and the government has dropped its most controversial element, taxing unrealised capital gains, after warnings it would penalise investors who hadn't sold assets.

"This morning on my recommendation, the cabinet agreed practical changes to make the superannuation system stronger, fairer and more sustainable," Chalmers told reporters.

The $3 million super tax: original plan, backlash and revisions

The new tax rules, called Division 296, was first announced in March 2023 and scheduled to start in July this year.

The proposal followed Treasury data revealing that 39% of super tax concessions flow to the top 10% of income earners.

The measure was expected to raise about $2 billion in its first full year. Chalmers says the revised plan will raise slightly less than the original, costing the budget $4.2 million mainly because of the one-year delay.

Over the long term, revenue will be much lower because the thresholds will be indexed to inflation.

The plan faced mounting criticism even from within Labor and was never introduced to parliament.

In June, Chalmers defended the changes, saying concessions remain "very generous" and opposition came from a small group of high-balance holders.

"We're not scrapping concessions for large balances," Chalmers said. "We're still offering generous tax breaks, just slightly less generous."

Last week, Treasury deputy secretary Diane Brown told a Senate estimates hearing the government is still considering changes to the $3 million super tax proposal.

She said the Prime Minister's office had raised questions about the bill.

"It's probably not unusual for that to occur from time to time. It remains unlegislated, and so stakeholders continue to raise questions about the bill," Brown said.

Division 296 scraps tax on unrealised gains

Perhaps the biggest change is that the tax will no longer apply to unrealised capital gains, addressing one of the strongest criticisms of the original proposal.

This would have meant it was taxed even without selling assets, which would've spelled bad news for investors.

This prompted panic selling among self-managed super fund (SMSF) holders.

CPA Australia was relieved to see the government change course on its this provision.

"This was a particularly egregious element of the government's initial proposal," says Richard Webb, the accounting body's superannuation lead.

"Providing certainty and financial stability for this and future generations of retirees is critical. Taxing unrealised gains would have distorted our tax system, which needs broader reform."

Bryn Evans, a private wealth adviser at Integro Private Wealth, says the changes are a win for people who hold assets like farmland because tax will only apply when the land is sold and cash is available, rather than on paper increases in value.

However, Evans warns the announcement left some questions unanswered, particularly around capital gains.

Super funds currently receive a one-third discount on gains for assets held longer than 12 months, but it's unclear if that will continue.

"Without such a discount, there may still be implications for how assets like farmland are owned," he says.

Evans also points to the complexity of implementing the new rules.

"Now that members within a fund will be taxed at different rates on earnings, there could be a need for super funds to do more work," he says.

"It will be interesting to see how the government tackles this and what costs will be incurred by funds and their members to comply."

Boost for low-income earners

Alongside the crackdown on large balances, the government will increase the Low Income Super Tax Offset (LISTO) from $500 to $810 and expand eligibility to workers earning up to $45,000 from 2027.

Women in Super CEO Jo Kowalczyk called the move "a monumental victory for fairness," saying low-income workers - mostly women - have been short-changed by $3 billion since 2020.

For women in the lowest brackets, the change could mean up to $60,000 more at retirement, helping close the gender gap in super savings.

"This reform is particularly significant for the women who form the backbone of our essential services - carers, education aides, hospitality workers, sales assistants, and health workers," says Kowalczyk.

"Realigning the LISTO ensures the tax concessions paid to low-paid workers are consistent with the objective of our superannuation system and addresses a key economic imperative to ensure tax concessions are more effectively targeted."

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